Orange SA (ORAN) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to France Telecom 2011 first-quarter results conference call. The call will be hosted by Gervais Pellissier, Deputy CEO and CFO, with members of FT's executive committee for the Q&A session that will start after the presentation. Thank you and let me hand over to Gervais Pellissier.

Thank you. So good afternoon, ladies and gentlemen, and thank you for joining us for this call on the France Telecom Q1 2011 results. Let me briefly comment the major points of this quarter, and then we will have the usual Q&A session with my colleagues.

So if we turn to page 5, just as a first comment on our results, just to day that those results are solid results, as we said in our press release this morning, and in line with all expectations as seen also with the objective we have taken vis-a-vis our investors on the full year. I can start this first-quarter presentation by commenting the group customer numbers, which reached almost 216 million customers at the end of the quarter, which is an increase of 18 million year-over-year. In France, we have added over 200,000 new customers on the Open offer; this is (inaudible) we have launched last summer on the French market, where we have now more than 500,000 subscribers, helping us to achieve good net share [of conquests] in Q1 2011 compared to [the position] we had a year ago.

At the same time, our mobile revenue were up in France, up by 2% despite the VAT rate change, which impacted our first-quarter revenues and EBITDA at the [CID and DTA] level, by EUR70 million.

In Spain, revenues were up by 4% on a comparable basis, driven both by mobile and fixed activities. In Poland, we have recently reconfirmed our full-year expectations in spite of, still, a negative revenue trend, but with a decreased performance in terms of customer net adds, both in mobile and broadband activities.

In other countries, regulatory effects in Europe combined with the political unrest in Egypt have resulted into a slowdown in the revenue trend where revenue was increasing by 1.7% excluding regulation. And, last but not least, our Orange business services -- revenue trend has improved for the fourth consecutive quarter, now limit [revenue versions] less than 1%.

The (inaudible) impact of revenues' evolution on the different segments is a gross revenue before regulation, revenue growth before regulation, of 0.4%. Considering the revenue impact and including the impact we had on VAT, the year-on-year EBITDA margin evolution has been limited to 1.3 points of erosion. Restated EBITDA margin was also impacted by the ongoing situation of Egypt, by 0.2 points, whereas the VAT impact is valued at 0.5 points.

Page 6 -- a few main events, so we have continued to work on the, let's say, taking care and fixing the social issues on the French markets, maybe just two important pieces of news. One is the agreement signed on workforce evolution, long-term workforce evolution to facilitate staff career development. But also, we have signed an agreement on salary increase; it is limited to 2.5% increase as a global envelope for 2011.

As we get to the content situation, you probably remember that we have acquired, now (inaudible) behind us, 49% stake into Dailymotion, and that we are in the process to building a JV with Canal+ to merge Orange cinema series, our French channel, with TPS Star.

As we get to emerging markets growth, we are now getting closer to reaching our target in terms of revenues in AMEA by taking a 44% stake into Korek Telecom; the [Kurd] operator, third operator in Iraq, which is, after Meditel in Morocco, another move towards our objective to doubling our revenues in emerging markets by 2015.

We have also reshaped our portfolio and Telekom Polska have started the process to sell Emitel, their broadcasting entity, which would represent PLN1.7 billion sale, and 1.2 gain on assets, which is more or less EUR400 million capital gain for Group.

As regards to other type of partnerships, we got, a few days ago, the green light to share our network, mobile network, with DT in Poland, and we have announced on April 18 our strategic agreement with Deutsche Telekom to form a 50-50 JV for procurement, which should have benefits I will comment after.

And then, last agreement, big agreement that was signed during the period, this is the 2G/3G roaming with Iliad on the French market with an expectation of EUR1 billion incremental revenues over the next six years.

As regards to the JV between Deutsche Telekom and France Telecom for purchasing and procurement on page 7, just to mention that this was included in the five areas of cooperation that were previously disclosed between DT and ourselves, and this JV aims at improving our cash position and better [complement] with the consolidated vendor in the street by aligning conditions for both parents to the best price, aggregating demand and harmonizing specifications, upgrading relationships with key vendor partners, increasing (inaudible) standards and innovation and exploring ideas to jointly reduce cost and create opportunities for share benefits. This JV is to be established in the fourth quarter of 2011 and to start providing results and savings in 2012.

Our expectations is to reach up to between EUR800 million and EUR900 million savings per year after three-year ramp up, considering that in 2012 savings expectation are between EUR200 million and EUR400 million, both in OpEx and CapEx, keeping in mind that CapEx represents around 55% of the expected savings and OpEx around 45% of expected savings.

To come on our main figures for this quarter on page 8, so as I said, in line with the full-year business trends and objectives, revenue decreased by 1.4%; that's restated from regulatory improvements, so revenue slightly increasing at plus 0.4%, which is clearly above what we did a year ago, where revenue was still declining by 0.3%. EBITDA reached EUR3.7 billion at 33.3% revenue.

Excluding the tax rate change, excluding VAT rate change, the margin erosion is 0.7% compared to a year ago.

As regards to CapEx, we have reached really 10% of revenue spending on the first quarter, which is more or less a comeback to normal spending for first quarter and the year. 2009 was exceptionally low with very poor weather conditions, both in Poland but also in France, where the speed of implementation of investment was clearly slowed down in 2009, helping us to confirm our full-year guidance to reach 13% of CapEx to revenues in 2011.

EBITDA minus CapEx at EUR2.65 billion with a variation linked with, in fact, two phasing effects -- the low CapEx in 2010 and EBITDA pressure higher in 2011 due to the VAT episode will commence further, which happened on the French market.

On page 9, if you look at the revenue evolution for the different segments, you can see that the underlying dynamics are recovering different situations. France has been quite resilient with a strong performance on mobile. Spain has confirmed its very good situation, being able to offset both the decline in France but also the decline in Poland, whereas Africa/Middle East have a positive trend except Egypt with pressure, clearly, in Romania for Europe, and also pressure in Egypt, where revenue has declined by EUR25 million. And on enterprise, as I commented already, you see that we were with 7% of revenues in 2010, and now erosion is limited at 1%.

Regarding the EBITDA evolution, which was a 24.6% in 2010, so there is a positive contribution of the revenues. However, negative impact coming from regulation, VAT increase and commercial cost. Excluding commercial cost, EBITDA margin has grown by 0.3% from 34.6% to 34.9%. Let me comment that, again, we have continued to work on our cost structure in spite of the difficulties we may have in this field. This is something which has been also already achieved in 2010, if you remember.

As regards to VAT, there is a revenue impact with the increase of tax, and so the decrease of the price before tax to maintain the all-included price identical, at the same level, for customers. So VAT has not been passed on mobile, and neither on the month of January, where it was applied by the state at January 1. And this has represented a revenue and EBITDA impact of EUR46 million.

Commercial cost, in terms mainly of retention cost but also some accretion costs due to the volatility of the consumer base because, again, with the change there has been, maybe just to comment for France, the French government has decided to change the rate of VAT for the TV proportion into either the triple-play or the mobile subscriptions. This change of VAT rate, which is a raise from 5.5% to 19.6%, was representing depending on the monthly fees, an increase between EUR2 and EUR6 or EUR7 or even EUR8 a month. The increase has been fully passed on customers for DSL business for the triple-play subscriptions, which has represented, in average, an increase of EUR3 per subscription, EUR3 a month; whereas phone mobile, after confusion between the different players, our competitors have decided one after the other not to pass the VAT on their mobile customers. However, since the decision was taken late, especially for SFR and ourselves, customers had the opportunity to get out of their existing contracts and to sign a new contract with a new price to (inaudible) to subsidy. And this explains why, because of this increase of churn created an opportunity to churn, increased by -- created by [low versions] who needed to stabilize the customer base by spending additional subsidies.

Regarding OpEx in detail -- so, as I mentioned, Group has been working on its cost structure to continue to decrease the OpEx space excluding commercial costs by 2.3%, with a pressure on interconnection cost and a smaller pressure on the other costs. In Q1, commercial expense increased by EUR185 million, which is more or less 12%, more than 12% increase, with the spending, increased spending in France, as I described just a moment ago, whereas some further increase in Spain -- but again, to fuel the engine, to capture more customers.

Regarding CapEx, on page 12 -- so it's around 10% of revenues compared to 8% in Q1 2010. CapEx level of 2010, as I mentioned, was especially low, mainly an increase of very specific conditions, especially weather conditions in Poland but also in France, whereas in 2011 France has continued to increase its spending in customer premises equipment, mainly the migration of the Livebox base to a new generation of Livebox, which would enable us in two major directions. One is to be able to launch in the second half of the year the so-called new TV experience, where we would clearly enhance the TV services for our customers. And the second objective into migrating the Livebox (inaudible) to improve the quality of service and also to open the (inaudible) Wi-Fi projects we have also in our plans for second half of the year.

There has been, also, in France an increase of the FTTH CapEx from EUR5 million spent in 2010 compared to EUR36 million spent this year, in line, again, with our EUR2 billion plan that was announced last year that we use as a ramp up would lead to a much bigger expense in first quarter 2011. In Poland the increase is mainly linked with the development, deployment of 3G plus that works, whereas we continue to invest on DSL. We have invested less than last year in Egypt and Ivory Coast, with the political situation, whereas we have slightly increased in Niger and Mali, and we have continued to deploy submarine cables, especially around Africa.

We come now to the performance by segment on page 14, of France. As, again, we said, Q1 has been quite agitated because of the VAT episode. I think, again, one should consider that the VAT episode has been an occasion for competition probably to try to go quicker into decreasing prices and to attracting and modifying the customer bases. And this, I think, has shown how nervous the market was in expectation of the arrival of the fourth player at the end of the year.

But in spite of this, domestic activity has shown a very resilient quarter with a strong performance in mobile revenues but -- and this is mainly due to the strong push in data revenues.

As regards to the home revenue, it's still impacted by the PSTN line losses, partly due to our strong push to migrate PSTN plus DSL customers to naked DSL customers when we consider that the price gap, gap income versus competition, is putting them into risk to stay with us. And, however, we have -- I will come back on that. We have a good market -- good [shelf conquest difference].

Regarding mobile KPIs on page 15, again strong increase of net adds, of MVNOs, with opportunistic moves. So we have lost ground in terms of retail market share; however, keep -- we have kept our share of network at 46.6%. Again, this is a stronger move of markets to other MVNOs is mainly the result of the VAT rate change, which has opened the door to customers. And at the same time, I think this also shows that there will be big players, or bigger players, when the fourth infrastructure player will come on the market. Clearly, Virgin is one of them. You also have the French Post Office will launch their service now in one or two weeks from now, which means that at the end of the year, when Iliad will appear into the market, they will not only face the competition of MNOs, but also of strong and stronger MVNOs with pricing policies and [stock] or subsidy policies very aggressive.

And what's happening on the French market is probably one scenario we had in mind, which is to say that pricing points, globally speaking, if you take into consideration to the pricing point the level of subsidy and the tariff, we probably have come down, clearly, in advance compared to what Iliad will launch on the market.

I want to remind you that the VAT effect is very [conjunct] to all, that now the contract closed again, and will end at their normal termination rate. And as a consequence, we have observed a very high level of commercial activity, very high level, of course, as compared to the normal Q1. Generally, Q4 is a very big month of activity, and Q1 in our business is a much slower month, at least in France. This has not been completely the case this year.

Another point I want to mention is that our (inaudible) and segmented market strategy -- we have managed to limit strongly the leakage of valued customers. And as you know, Orange is also the leader in wholesale in mobile. Thus, we were able to maintain our network market share, as I said, and to grow our wholesale revenues for this period.

Regarding home KPIs in France, on page 15, I think there we have been very resilient in terms of market share and share of conquest because all contracts were open with the change of the VAT rate, which means that all customers or nearly all customers except those acquired in December could leave us, and we have clearly limited the churn at a very reasonable level, not much higher than what it was before, whereas clearly the gross conquests, the gross adds, have been lower, mainly an increase in the dynamics of some of our competitors who had launched at the end of the year new boxes and new [tariff offers], especially with the unlimited for mobile.

This offer of unlimited phone mobile is now in our catalog since early April. For EUR3 additional, you have unlimited calls to mobile on our triple-play offer. And at the same time, we have had a very good performance in this first quarter on our open quadruple-play offer with 209,000 additional customers won, out of which probably two-thirds -- actually, a little more than -- sorry -- a little more than 50% are acquisition, and a little us than 50% are migration from existing customers. So at the same time, it's a very good loyalty tool, which is also a very good acquisition tool, especially to convince customers to join us for one of years of the business where they are not in today.

Regarding Spain, on page 17, just to confirm the acceleration of the revenue growth at compared even to Q4, and also to mention that both on the two lines, both in mobile and on fixed, revenues have grown in very reasonable terms, especially for mobile.

As regards to (inaudible) KPIs for Spain, on page 18, customer base has continued to grow by more than 4%, especially for the contract customer base, which has grown by 7.5%, mainly driven by two drivers. One is the strong marketing segmentation we have been implementing through the [animal] offers and as some other countries. And the second tool for improving the situation is the smartphone penetration, where Orange Spain is the leader, especially remains the leader in terms of iPhone sales in the first quarter of the year. And also a good achievement in terms of mobile is the increase of the mobile data revenues, where, thanks to this push on smartphone, Spain is catching up progressively in terms of mobile revenue proportion is in the total -- mobile data revenue production in terms of total mobile revenues. And this has also had positive impact on the ARPU.

As regards to Poland, so trends show that revenue are resilient, in spite of, still, regulatory impact, with gross mobile, 4.5% revenue growth before regulatory impact. And in the home segment, still strong pressure on the revenues, mainly an increase of PSTN decline. But, again, PSTN decline itself being linked, still, by a strong fixed/mobile substitution, which, by the way, is not true in France at all. It's a specific also in terms of tariff and positioning of the Polish market to have this fixed-to-mobile substitution, which is not true in all countries.

As regards to operational performance indicators for Poland on page 20, the mobile customer base has continued to increase with a significant increase in postpaid customer, plus 4%, which represents now 48% of the total customer base. The ARPU has been slightly declining, by 1.5%, and smartphones are also penetrating even more. They represent 28% of the contract customer sales, with data representing 26% of the mobile service revenues in this first quarter of the year.

On the fixed side, broadband base is up by 35,000 customers, and this is the second consecutive quarter of growth. Focus on broadband is on the development of speed and TV offers (inaudible) to increase the ARPU and to gain new customers. Concerning the broadband market, a new pricing structure has been launched in October 2012, which favors ARPU increase by deploying top speed options, and now top speed options are representing 42% of the sales in Q1 2011, compared to 7% in Q1 2010.

The Polish TV offer is also showing ongoing success with the number of customers increasing by 38%, to which 577,000 customers, both in IP and [in DTH] TV with 25% of the customer base.

As regards to other countries, revenues are down by 0.8% including regulation and 1.7% excluding regulation, a number of smaller customers, plus 22%, mainly driven by emerging markets. And at the end of the quarter that just reached -- they are just above 90 million customers, mainly driven by the emerging markets operations.

In Africa-Middle East, revenue is at [5.8]% (sic -- see presentation) increase excluding Egypt, whereas including Egypt, unfortunately, revenue increase is limited at 0.5%. Egypt revenue has been down by EUR25 million, mainly linked with, let's say, the strong competitive situation that was already in the air before the end of the year. But with difficulties which have been increased by the political changes in Egypt, where we have seen few days, [or] (inaudible) seeing a few weeks without being able either to deliver the service or to sell our offers.

Maybe to mention that situation in Ivory Coast has also been difficult and remains difficult, but with little impact on the consolidated figures in Q1. We should see more impact in Q2, 2011.

For European countries, first-quarter revenues are down by 3.1% with a strong regulatory impact, and because before regulatory impact revenue would have grown by 1.2%. And the only country where revenue and (inaudible) impact is under pressure is Romania, where GDP evolution [is still not achieving], remains under pressure.

Finally, our operations in Tunisia/Egypt/Ivory Coast has been, as I said, affected by the political noise, with a little impact on Tunisia, probably more a stronger impact in the two other countries.

For the Enterprise division, revenue trend has improved gradually in 2010, and also in the first quarter 2011. Our overall revenue decline is limited to 1% of revenues, whereas it was more nearly 7% in the first quarter 2010. This improvement is achieved on a favorable comparable base because Q1 2010 was very low, and there have been a few nonrecurring items (inaudible) consider that without those nonrecurring items, revenue would have declined -- would have been declining by 2%, which is also an achievement compared to what we have in doing in the rest of 2010.

The transformation of the revenue mix has continued. The figures (inaudible) business, representing 34% of the revenues; they were representing 38% of the revenues in the first quarter 2010. And this first quarter has been (inaudible) in terms of new commercial offers and new contracts, just to mention that we have signed a renewal of the six-year IT system for GDF Suez and a 15-year contract for hosting private cloud with this customer.

Last but not least is the UK JV with Deutsche Telekom, Everything Everywhere. The JV is progressing well and has a significant momentum in terms of achieving its synergy plan, especially by building UK first super network and it is ahead of its synergy plan, which is to deliver GBP3.5 billion synergies in the five years of the plan.

In spite of a challenging economic environment, Everything Everywhere has added [160,000] postpaid customers, sustaining a growth in service revenues around 1.6%. That has also been the second successive quarter of strong growth in the T-Mobile contract customer base following investment on the brand.

Prepaid customers continued to upgrade their contracts with an improved value in entry-level tariffs and increased smartphone availability, delivering a better value mix. Our colleagues from Everything Everywhere are clearly confident to achieve their ambition of reaching an EBITDA margin above 25% in 2014 in spite of the ongoing challenging regulatory and market conditions, which is a pressure from competition. There are -- question on spectrums that we will be seeing in a few months, but also the [overall] economic conditions with the pressure on the UK people in terms of public spending (inaudible).

Last slide, as a conclusion -- this is to remind you a few important dates for your diary for the next two months and a half. So we invite you; you're all invited to our investor day in Paris on May 31. Sorry to have changed the date by a few days, but maybe some of you know that there is the G8 as well in France just the week before, which was (inaudible) with some issues, especially because a few CEOs from the telco and Internet industry are invited to participate to this G8 that will deal also with Internet issues.

France Telecom Orange will have its general meeting on June 7, and we will pay the dividend on June 15 and will publish our first-half results on July 28.

Thank you very much. Now we are ready to answer to your questions.

(Operator instructions). Dimitri Kallianiotis, Citi.

(technical difficulty) the fixed-line (inaudible) is getting worse. When I look -- in particular, you give some details and you show, for instance, the line loss on the poor people who have got PSN and their DSL is going up quite significantly. And I would have expected that, once people get ADSL on top of PSTN, they'd don't -- they tend to churn less, which is clearly not the case.

I just wanted to know if you think -- why you think we have seen that increase because prices have gone up in France [in six], and if that is temporary or if there's something structural there.

My second question is on the competitive intensity in mobile following Q1. You mentioned that the churn has gone up, obviously, in Q1 but not much before that and not much more than what we've seen in the past, but [also for contracts] about 16%, which is the highest level I can remember. Just wanted to know if you are seeing churn coming down and if you expect churn to come down throughout this year.

And my last question was just on your portfolio rationalization. If you could just precise what's core and what's non-core in your outperforming, please; thank you.

On PSTN, on PSTN churn, two comments on that. First of all, it's not new. You remember that last year and especially even in the second half of 2009, linked with the economic crisis, we have had some additional PSTN churn for -- there are two main reasons. One is the fact that voiceover IP is working very well in France. So there is a technical reason; we have strongly improved the quality of voiceover IP. And for a lot of customers there is no need, no real need to keep a PSTN line.

So second point is that last year we were clearly [dispositioned] in terms of price compared to competition, especially for those customers who have broadband, dual-play, plus PSTN. Clearly, the price points -- the price they were paying compared to what competition could offer to them was very high. And this has increased, clearly, the churn, as I said now, for the last 18 months.

We think that -- and we have started to work on that last year -- we think that those customers who are consuming very little voice, who are paying the subscription fee and, at the same time, who have a DSL or a broadband line -- we need to be very careful because they are very fragile. And so we have improved also our marketing analysis of those people, have decided to be proactive into proposing a triple-play offer when we thought it was really the best way to keep the customer for the future.

However, we think and we are working on how to improve the PSTN offer for the remaining customers, and we'll make a few announcements in the future, especially including probably the possibility to better bundle, maybe, PSTN with other offers. So we are working on that. We have a few regulatory issues because we cannot -- you know that we got the approval to cross the base between broadband and between mobile, but we don't have the right to cross the customer base between PSTN and broadband and/or mobile. And this is where we are quite careful into progressing on that.

But our intent is clearly to work on that, but I think this is underway.

Second point -- there is clearly good momentum in terms of migration on quadruple play, which means that we are also improving that and working on that, which should help us for the future. As we get to mobile, clearly, with the VAT rate issues we have seen a fairly exceptional churn in the months of January, February and March. And when I say January-February, because it has [even] (inaudible) in February since we decided not to pass on VAT on mobile.

This churn, and I've mentioned it in a few occasions, is also a churn that will not replicate in the months after because the customers who have been signing with us in this period are now committed for one year, at least. So this is also a kind of concentration of churn. Part of this is a concentration of churn for people who would have churned in the course of the year.

And when we look at, without commenting, figures after end of March, I can tell you that our churn rates in March, also in April, have come to a reasonable level.

As regards to the portfolio rationalization, there has been a lot of comments on that. But in fact, there is not much new said compared to what Stephane Richard said on February 24. I actually remember, in answer to one of the questions of you guys on the full-year results presentation, Stephane said that, except France -- and I would say except France plus Poland plus Spain today -- no European country is not under review, which means that any of those countries we are asking ourselves the question whether we continue on a standalone basis, which could be the case for most of them, whether there is an opportunity to consolidate as (inaudible) with another mobile operator because just not to forget that most of those countries except Spain, Poland and France are mainly mobile, are mainly mobile, okay.

And so as we continue on a standalone basis, while we might find an opportunity to grow by consolidation, or we may consider that in the next year, 18 months, we may be in a situation where it could be -- there could be an opportunity to divest. But for divesting, you need to have projects and you need to have potential buyers. And, today, there is no ongoing project in no one of those countries. But this is a process which is underway, which was already underway before. I just remind you that one year ago we have stopped the consolidation project in Switzerland we had undertaken with the previous shareholder of Sunrise. So that doesn't mean that it could never happen in the future in either one of those countries.

Thank you very much.

Jonathan Dann, Barclays Capital.

Two questions -- the first one, in the Enterprise division, were there any one-offs in the ERS division that supported the strong recovery?

And my second question is around the dividend. It seems like earnings are running ahead of expectations. Two parts -- do you think there's any chance of, or will you look at higher shareholder returns? And secondly, could you just remind us of your plans on the interim dividend for 2011 in terms of the timing? I think you had mentioned delaying the payment -- or, sorry -- more evenly spacing the payments.

Ah, good question. Honestly, I have not the answer to your last question. We are thinking about it and probably we will give you an answer on May 31. You are right; the interim payments, which normally is in September we need to think about it -- I'm very sorry, but no answer today on that.

Regarding the situation for Enterprise division, I mentioned there are a few one-offs on the revenues, especially linked with the [TPS Star] project deliveries, especially in IT system delivers and GlobeCast signing. You know, GlobeCast is a broadcast Company which signs (inaudible) contracts to broadcast TV. And this explains some of the revenues improvement.

I mentioned that, excluding those exceptional items, revenue decrease would have been 2.7%, which is clearly an improvement compared to a year ago but still in decline.

Regarding dividends, in your comment I think there is something not completely right. Returns on profit may be slightly better than expected, but they are lower than last year. So -- and from the very beginning, we have always compared our dividends to the cash flow. And today I cannot tell you we will increase the cash flow again. I can confirm our cash flow guidance, but I don't see much margin of (inaudible) to increase against that, so I think it's a little premature to comment on an increase of dividends -- very sorry. I would be much happier if I could say something different, but it's not the case yet.

Thank you.

Hannes Wittig, JPMorgan.

Two questions -- the first one relates to the EUR59 million provision release. I just wanted to know if we should be expecting a similarly sized provision release to benefit the quarterly revenues going forward this year and next.

And secondly, related to French mobile, maybe you could give us a bit more color as to why, despite the smartphone growth and the strong push you have made in the last quarters, we have not seen a service revenue improvement -- rather, a slight deterioration this quarter.

Sorry, but we have not clearly understood. And clearly, I have not understood myself your first question.

My first question relates to the provision release with agents who [content] costs of EUR59 million that you have highlighted in your press release today. And that, to my understanding, relates back to the EUR547 million provision you took last year. And my question is whether that would be an ongoing item in the quarters going forward.

Regarding your first question, our expectation is that we should release around EUR100 million for the full year in terms of content against the reserve which has been built at the end of last year. So there was some -- so seasonality of cost is not linear, and this is what explains why [our] expense -- why this happened like that. Just remind you, for the, for instance, soccer starts end of May and starts again end of August. So end of Q2 and early Q3 are (inaudible).

Regarding service revenue, the main impact on the revenue decline for France is linked with the VAT rate inclusion. The -- more or less the year-on-year decrease is [at par] with the VAT impact. And, excluding VAT, we have a stable service revenue. And excluding termination rate cuts, we have a 6% increase.

Thank you. Does that answer to your question?

Yes, it does. Thank you.

Frederic Doussard, Oddo Securities.

Two questions -- first, regarding your Q1 ADSL market shares in France, it seems to be around 20%. Are you still confident to be at the 30% level for the whole year 2011, and do you think that will be the case as of Q2?

And second question is regarding the increase in commercial cost due to smartphone. You mentioned this point during the presentation. And do you think it is a sustainable trend, or when do we expect this trend to slow down?

Regarding your first question, the 20% net share of conquests in the first quarter is in line with our expectations, and it is linked with (inaudible) the seasonality generated a gain. If you look on all the last years, even considering that last year was very exceptional; but if you take 2009, 2008, 2007, you will see that we have a different split of share of conquest between first part and especially between first quarter and the rest of the year, as this is generally our weakest quarter, whereas in the course of summer, where all our shops remain open, we are generating much better line competition. That is the first point. So we are confirming our internal objective to reach 30% of net share of conquests in the full year.

The second reason is also the fact that we see seasonality (inaudible) still increase the timing of tariff changed and new offer introduction. We generally launch our new offers every year in April, not on January 1. And these will be the cases here, with the offer I mentioned on triple-play, which is unlimited mobile on triple-play.

The second point is that we are increasing our capacity to cross-sell between the mobile and fixed customer base, which would improve our performance. And the last point is that we should launch for second half, at the beginning of second half, our new TV experience, which will also improve and help us to catch up against some of our competitors in terms of TV experience, where we are now slightly lagging behind. Just to remind you that we have not launched a new box last year; and, by the way, it's a chance because at least we cannot compare our box to the box of our best competitor in this area. But we are continuing to deploy our box, our Livebox 2, and we will launch a new TV for just after summer.

And do you already see that the impact of new boxes is less than it is in the last --

No; our view is that it has been at least -- you said new boxes, and you have two new boxes. There is one where our feeling is that there is not the expected success at all. I will not mention the name of the competitor -- and another one where there seems to be a strong success within the customer base, because one point also we should mention is that in our 20% nature of conquest, there is a very good churn performance in spite of the VAT impact, which means that, in fact, our ability to attract new customers has been lower compared to what it was a year ago, especially new fixed-line customers we have attracted [through Open] new mobile customers which were not mobile with us. So this has been lower. But we have had a very good churn performance.

Just also to mention that one of the two competitors has been very good into coupling a box offer with very well renewed marketing offer with the unlimited access to mobile. This is what makes their performance and will make their performance, probably, good on this quarter.

As regards to commercial expense in H2, I think -- and this is what we will comment in the inventory -- I think, based on the pricing strategy and distribution strategy on the market, especially with the arrival of the fourth player, we may have and we may enter into a bigger split of the French business between -- even within the valued customers, between customers with subsidies and customers with less or little or no subsidy, kind of -- we will see whether the [similarly] business model, which is not very effective today on the French market, will succeed. And, depending on the, let's say, on the mix between those different business models, commercial expense could be different. We will see that.

What you expect, however, is that, probably not immediately in H2 but probably in 2012, we will have the first positive impact of the purchase alliance with Deutsche Telekom on the handsets.

Okay, thank you.

James Britton, Nomura.

Two questions, please -- first of all, can we expect structurally lower CapEx following the JV agreement with DT, or should we expect FT to replace these savings with new or accelerated investments in next-generation networks?

And then the second question relates to slide 15, in your pack. Here you highlight that SMS revenue has grown substantially as a percentage of revenue, and it's now at almost 17.5% of revenue in the French market. Can you just explain why SMS revenue has still grown so substantially? I think SMS termination has come down over the same period. And also, how will you defend against this messaging traffic moving over to instant messaging applications on smartphones, as KPN warned us might happen in the future?

On your first question, on CapEx, it's a little early to give you a definitive answer. What we can say in the valuations which have been made with DT is on a constant CapEx spending and concerns constant OpEx spending. We would save, as we said, between EUR200 million and EUR400 million in 2012, which means that if we were spending exactly the same CapEx with the same profile in 2012, we would save probably around EUR200 million on the EUR5 billion or EUR4.5 billion network CapEx spending in the JV with DT.

So, however, we need to value -- and this is more a question for the Investor Day and for the long-term, what will be the profile of CapEx for the future. So my view today, I would say my first answer, my first intuitive answer, which is that it will really help us to keep and stick with a certain percent guidance rather than to decrease because, clearly, we have pressure on FTTH, as we said. We will have some pressure to deploy [ITE], maybe with a broader view in the beginning that one could have initially expected. And this will help us, really, to stick with the guidance.

But we will confirm that. Probably the two partners will confirm that when the JV will be in place because, again, I am careful. We all hope and wish and do all what we can to ensure that this JV will be put in place. We have [still] to face a few regulatory conditions.

Regarding your second question, on SMS, it is true that we have some dispute as to completely understand what has happened to KPN. What we can mention is that the fact that there is instant messaging, especially there is social network messaging. It's not a new phenomena and is clearly integrated into our pricing. However, we continue to see an increase of the SMS revenues, mainly linked with the bundles that lead to huge usage, in some cases, quasi-unlimited SMS usage. And this is increasing by 16% in Q1, but it is increasing. It is included into the bundles.

Secondly, our marketing strategy relies more into offering more value for the same or a higher price rather than to decreasing the price. This is what we have been doing up to now for value customers, and quite successfully.

Thank you.

Maybe the last point is that I think one of the very important items on which telecom operators may have evaluated, this is -- and we are working on this -- this is into better interconnect instant messaging and SMS because I think only this can provide with -- can provide customers with a seamless solution wherever they are and whatever the quality of the network.

Jerry Dellis, Jefferies.

Two questions, please; the first one related to commercial costs, on slide 10 of your presentation pack. You show that commercial costs increased by EUR185 million year on year, of which a little over 10% was attributable to the Q1 specific impact of VAT. So that leaves an underlying EUR160 million per-quarter impact from higher commercial costs. So I wonder whether that's the sort of level of margin drag that could persist between Q2 and Q4, or is there anything particularly seasonal in timing terms that might alleviate some of that pressure later in the year?

And the second question, really relating to Home France revenues -- throughout last year, Home France revenues were trending down between 2.5% and 3.5%, fairly stable, this quarter minus 4.5% after adjusting for the VAT issue. So is that reflecting a pickup in repricing effects that's likely to persist through the rest of the year? Is minus 4%, 5% the sort of Home France revenue trend we should be thinking about going forward?

Sorry, because I was checking to be sure that I tried to give you the best possible answer. I don't know everything in advance. I have two points on what you said.

First of all, clearly, on Q1 2011 there is an exceptional effect of VAT that we have [said], I think, to EUR24 million on the French market in terms of (inaudible) linked with the additional and extraordinary effort we have been obliged to do to keep -- to attract new customers in with a VAT change.

Second point -- we think that last year, Q4 was the high in terms of commercial activity. So this means that we will compare Q4 this year to Q4 last year. We will not have the same increase effects that we had a year ago, and this what we plan today. We don't think that we will increase as much the commercial expense in the last quarter of the year, this year, as what we did a year ago. This is truly our expectations, which means that you can expect, let's say, a slowdown in commercial expense increase in the rest of the year.

As regards to Home, the question is the repricing effect will slightly continue in the second quarter because the new prices were introduced in April and progressively deployed on the base, but you will no longer have the VAT effect, which is only linked with the month of January. This will not replicate in Q2 and beyond. And otherwise, we don't see any major change in the Home revenues.

Thank you, could I just clarify, therefore, in Q2 and in Q3 the picture with respect to commercial costs excluding the VAT-specific impact should be rather similar to what we saw in Q1?

Not exactly. I think the deceleration will be progressive. This is not plus 12% for Group in Q1. And you will have a progressive (inaudible) and plus 2% in Q4. So the move will be progressive over the year.

Thank you very much.

Frederic Boulan, Morgan Stanley.

Just wanted to come back on the prior question, on the revenue picture. For fixed revenues. So fixed revenues were minus 4.9% in Q1 versus 3.1% in Q4. The VAT is in there, but it's a pretty small impact on fixed. So we've seen a very significant worsening in top line.

Can you come back a little bit on the driver ex-VAT and your expectations? Are we going to stay at around this level? And in particular, we've seen line loss accelerating, we've seen lower broadband revenues and lower traffic revenues.

And secondly, on the mobile side -- sorry, just to finish on fixed, I would also like you to come back on the decision in early April to cut the entry price which (inaudible) by EUR3, considering you're very -- you I think, pretty solid net adds in Q1. And I also have a further question on the (inaudible) [later].

I think the evolution of the Home revenue -- you have it on page 14, and I will just refer to page 14. As we mentioned, there are two, let's say, negative impacts compared to a year ago. There is some slight, let's say, increased impact from PSTN decline. There is -- but what's more important and different compared to a year ago -- this is a low increase of Internet lines, plus EUR14 million. And as we said, in this there are two, let's say, effects or two causes, one that will disappear, another one that will still continue in Q2 and probably for some parts in Q3, and much less in Q4.

So the first one is the VAT. So VAT will disappear in Q2. And what will continue is the reprice of the broadband base, progressive reprice, when people are renewing their contract, of the broadband base. That will continue in Q2 and Q4, okay.

And then there is a positive impact that will continue to grow progressively. This is the impact of the quadruple-play offer of Open that is increasing as revenue, and which is accounted in the last part of the slide, page 14, which is in the component wholesale and others. Okay?

So we expect two positive effects compared to first quarter, in the next quarter, less PSTN decline; we are working on that. Okay? More internal growth because there is no VAT and we will have the natural result, of course; I think, if I take into account the VAT (inaudible) total growth of EUR30 million, the VAT impact is -- EUR30 million, yes. So the total is in the range of EUR30 million internal growth, and probably some more impact of Open. Okay? Is that clear?

Yes.

And then, maybe last point, you have on page 16 the situation of the ARPU, and you see that there is even this PSTN move because this was a question also from one of your predecessors. This PS -- and I think it was (inaudible) -- this PSTN move is rather positive in the long-term because the ARPU of customers who have Internet and PSTN is increasing slightly between 2011, 2010, and the ARPU of total broadband is also flat excluding VAT.

And maybe last point, I think, which is a message positive for the market as a whole, is that I think on the broadband market in France, and it's a market which is similar for all players, everybody has [spent] on the VAT and everybody has taken opportunities to increase slightly prices and to increase ARPU. The (inaudible) unlimited to mobile is a paying option for everybody. The new box of some of our competitors is a paying option. So I think there is new trend and new push to decrease price on broadband.

Okay, thank you. And on the mobile side, the question I had related to Iliad entry in the market in 2012. Are you taking specific steps to address this? And are you planning, for instance, to launch a campaign later in the year to look at customer base, once Iliad gets in? Or, on the contrary, as you seem to be saying, marketing is probably going to be more on the reasonable side versus last year?

First of all, I think I will leave my colleagues on (inaudible) in more detail on May 31 because, if you are asking me all the fairly hard questions today [and] I give all the hard answers, I might be in the situation not to give the right answer. So, to be deceiving, not disappointing, but at the same time I think there will be less to be said on May 31.

What I can say is that we are working on that. It's clearly a hot subject to us, and I mentioned it very briefly when I mentioned that the business model could evolve for value customers between probably a change of mix between [similarly] and highly subsidized customers. When I say that, this means that we are building up scenarios which go and take into account those potential moves on the markets.

Second point -- we have signed the 2G-3G roaming agreement with Iliad as a hedge to this. Clearly, not all of you are persuaded that this may be a good move. I can tell you that on a pure financial basis, it is clearly a good move whatever happens with Iliad, whether Iliad is successful or not. Okay?

Last point -- I commented also in this speech what we have seen in terms of pricing points put on the table by competitors. Okay? (inaudible) pricing, PSTN pricing, are now at price levels which are clearly down compared to what it was six months, even six months ago. We are ourselves adjusting to that but keeping our position as a premium brand against our competitors, especially for the valued customers. So we will take also this year of 2012 to see how much our [effective] Iliad rival could be on the market; they are preparing different strategies.

Among those strategies, among those strategies are offensive strategies because also one thing that nobody should forget is that, when there is a new entrant with a strong fixed base who wants to penetrate the mobile base, its weakness and the part he has to defend its fixed base. We have seen that in the second half of 2010, yet it was not so good to defend its fixed base. So this is part also of the strategy, not only strategy from France Telecom Orange, but also the strategy from all the players in the market in this, for instance, why quadruple-play is so effective into not only protecting but also being offensive in some areas now.

Okay, thank you very much.

Thierry Cota, Societe Generale.

Yes, good afternoon, this is Thierry Cota from SG. I would have two quite unrelated questions. First, on the Ivory Coast, unless things improve rapidly do you think there is a serious risk of depreciating the asset at some point over the course of 2011, given what has happened recently and [apparently] still happening in April?

And secondly, I would like to go back to slide number 10. There is an Other item in the breakdown of the EBITDA trends year on year. And I guess that other item, which is very, very small, includes gross cost savings. Can you give us some idea of what has been the pace of cost cuts in Q1? Has it been similar to H2 2010, which was over EUR100 million per quarter, if I'm not wrong? And EPS -- what have been the offsetting factors to get such a small Other item, I would add, especially as interconnection costs also presumably have dropped?

Marc Rennard, who is the head of the AMEA, will answer on Ivory Coast.

Regarding Ivory Coast, the main risk impact will affect Q2 for April and beginning of May. Our recovery plan is now that we will fully recover beginning of Q3 with a significant recovery beginning during June. The main point now is to rebuild our network that has been damaged, especially the Internet network around Abidjan and Yamoussoukro.

So you are not in the mainframe of moving towards a structural lowering of the valuation of the asset?

This is something we will have to look at in the second half of the year. On top of what Marc was saying, two important points -- first of all, we strongly believe that international help, especially French support, will speed up the recovery of the situation in Ivory Coast and that ourselves, being French and being Orange, we are in a good situation, especially compared to some of our competitors, to see this as an opportunity.

Let's be clear. French support to the legal power is [quasi]-beneficial to us, especially compared to some of our competitors, whose main country or home country was not as supportive as France to Mr. Ouattara. Politics can play a role in this situation.

Secondly, the Minister of Economy was, last week, the new Minister of Economy was, last week, in Paris with Mrs. [Lagarde] and they have met Mr. Richard. We will get some governmental support to help us to quicken our -- the restoration and the improvement of our situation, especially in terms of physical infrastructure.

Second question -- the second question, on the performance program, we disclosed the situation of the preference program on a semester basis, not on a quarterly basis. And we will comment on that in the medium-term view on May 31. But you can imagine that there has been improvement on the cost structure. This is because the performance programs are ongoing; this is what was reflected on page 11.

Okay, but just to make sure I understand, the item Other, which is EUR3 million on slide 10, includes the cost [carrying] and the interconnection to cost drop.

Yes, but it includes all including the cost cutting. Okay?

Okay, and versus these two positive items [even quite] (inaudible) can you tell us what were the negative in terms of the other side?

We don't disclose the whole -- I am not clear enough (spoken in French).

Thank you.

Stuart Gordon, Berenberg.

Just a couple of questions -- just to go back to the broadband market share, I listened closely to what you said but I didn't catch whether you actually said you would meet the 35% market share of additions for the year. So I was just wondering if you could confirm that step part of the guidance to us.

And the second one is I just had a question from the 2010 accounts about the income tax expense, the 1.946 relating to the tax audits for 2005. I believe you are expecting to receive a request from that from the tax authorities for which you may have to provide a bank guarantee whilst it went through the courts. I was just wondering what the situation was with that, if you had provided a guarantee and, if so, for how much. Thank you.

On your first question, I'm sorry, maybe I was not precise enough. Clearly, we aim to reach a net share of conquest of 30% on the full year. This is clearly our intent. Okay?

Thank you, yes.

On the second question, I'm not sure I completely understand what you are referring to.

In the 2010 account, you took a charge of 1.946 --

Oh, again, this is -- we have been, just to come back on this global issue, you are right; it's an important question. The tax situation for the end of 2010 and which is still valid up to now is that amongst a total amount of EUR8 billion tax loss carry-forward, tax credits we have been able to get out of the French tax situation, there is EUR1.9 billion under dispute with the French state. This is an amount under dispute but which has always been provided for into the consolidated accounts of the companies. This means this is a credit which has never been recognized as a profit for the Company but which is not paid, which is we have never paid the cash.

And this is included into our debt today, and the dispute is to be taken in front of a court probably not before 2014. And this is, at that date, that we will know whether we have to pay this amount or not. But today, the position of the Company and the position of its auditors is that this tax is not due. Is that clear?

Okay, thank you, yes.

But this is fully taken into consideration, fully taken into account both into our balance sheet as a debt, but also into our P&L statement, which means that if, by any chance, we had to pay this amount, this will not impact neither the debt nor the P&L of the Company.

Okay.

So I think it was the last question. Thank you very much for your participation to this call, and we hope to see you on May 31 at 11 AM in Paris. [Xavier] and his team will give you more details on that.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.