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France Telecom S.A. 6-K 2005 Table of ContentsSECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934
March 17, 2005
Commission File No. 1-14712
FRANCE TELECOM (Translation of registrant’s name into English)
6, place d’Alleray, 75505 Paris Cedex 15, France (Address of principal executive offices)
Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F
Form 20-F X Form 40-F
Indicate by check mark whether the Registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes No X
Indicate by check mark whether the Registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes No X
Indicate by check mark whether the Registrant, by furnishing the information contained in this Form, is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes No X
(If “Yes” is marked, indicate below the file number assigned to the Registrant in connection with Rule 12g3-2(b): 82- )
Table of ContentsCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Financial Report contains forward-looking statements about France Telecom (within the meaning of Section 27A of the U.S. Securities Act of 1933 or Section 21E of the U.S. Securities Exchange Act of 1934), including, without limitation, certain statements made in the sections entitled 1.1 Overview and 1.6.2 Implementation of IFRS (International Financial Reporting Standards) within the France Telecom Group. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “is expected to”, “will”, “will continue”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by the forward-looking nature of discussions of strategy, plans or intentions. Although France Telecom believes its expectations are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties. Important factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements include, among other things:
The forward-looking statements contained in this document speak only as of the date of this Financial Report and the 2004 Document de Référence and France Telecom does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Table of Contents
This Financial Report constitutes Chapter 5 “Financial Situation and Results” of France Telecom’s 2004 Document de Référence
Table of ContentsTABLE OF CONTENTS
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Table of Contents1. Analysis of the Financial Situation and Results
Evolution of the Group
The France Telecom Group, with its principal subsidiaries Orange, the TP Group (the Polish telecommunications operator TP S.A. and its subsidiaries), Equant and the PageJaunes Group, offers its consumers, business customers and other telecommunications operators, a broad selection of services ranging from fixed line and wireless telephony, data transmission, Internet and multimedia services and other value-added services. France Telecom currently serves 125 million customers worldwide.
In recent years, the European market for telecommunications has grown rapidly as a result of the culmination of a number of factors: the globalization of trade, the increasing consolidation of European markets, the rapid growth of wireless telephony, the advent and growth of the Internet and the development of data exchange.
Against this background and in an increasingly competitive environment, France Telecom pursued, from 1999 to 2002, a strategy for the development of new services and accelerated its international development through external growth with the goal of reaching critical mass in high growth markets on the European level, particularly in the wireless and Internet markets. These strategic investments could not, for the most part, be financed through equity, leading to a significant increase of France Telecom’s debt.
Following the launch of the “Ambition FT 2005” Plan at the end of 2002, the success of the plan in meeting the objectives of refinancing the Group’s debt and strengthening shareholders’ equity, as well as the positive results of the TOP Program (see section 1.2 The “Ambition FT 2005” Plan) in improving operations in 2003 and 2004, the Group gained greater freedom from its financial limitations and pursued significant debt reduction.
This has allowed the Group to fully dedicate itself to the development of its strategy as an integrated global operator, by anticipating changes in the telecommunications industry.
The telecommunications market is currently undergoing a transformation. Customers now possess a broad selection of communication tools with highly developed options for use, however offers made to customers remain fragmented. Indeed, the world of telecommunications continues to be divided into distinct networks and services (fixed line, wireless, Internet). The goal of a global operator such as France Telecom is to place the customers’ concerns at the forefront of its services, in order to offer an integrated universe of communication, regardless of the handset or network used. As an integrated operator, France Telecom’s objective is based on the convergence of fixed line, wireless and Internet services.
France Telecom possesses a full portfolio of activities (fixed line, wireless, Internet) which address all types of customers (consumers, small- and medium-sized businesses and multinational corporations) and uses (personal, home, professional) for most environments (home, office, travel, mobility). These activities provide the Group with optimal advantages to meet customer expectations and develop comprehensive offers of communication services.
This integrated operator strategy materialized at the end of 2003 and in 2004 following the acquisition of minority shareholder interests in Orange and Wanadoo, the integration of Wanadoo into France Telecom S.A., the implementation of a new organization for the Group pursuant to this strategy, and the sustained launch of new services. These include a new range of offers for residential services, acceleration of the roll-out of very high-speed Internet for businesses, the launches of the “Internet-Television Mutiservice” offer (television service through ADSL), “MaLigne Visio” (a service to provide video-conferencing capabilities on a regular telephone line), “Orange Intense” (the offer by Orange for third-generation services, which will enable Orange Intense subscribers to communicate by video-conference to subscribers of MaLigne Visio and Wanadoo Visio) and ADSL 2+ (very high speed Internet services up to 18 Mbit/s).
Furthermore, a significant change in France Telecom’s shareholders occurred in 2004. On September 7, 2004, the French State sold 10.85% of its shareholding in France Telecom, held directly, and indirectly through ERAP, a public industrial and commercial state entity. The sale was completed by means of a private placement on September 1, 2004 to qualified investors in France and institutional investors outside of France. At December 31, 2004, the French State held directly, or indirectly through ERAP, 42.24% of France Telecom’s share capital compared with 54.53% at December 31, 2003.
Business segments
In order to reflect the Group’s evolution and the structure of its operations among its various activities and subsidiaries, France Telecom has identified the following six business segments: “Orange”, “Wanadoo”, “Fixed Line, Distribution, Networks, Large Customers and Operators”, “Equant”, “TP Group” and “Other International”.
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France Telecom’s segments evolve to reflect changes in its activities and organization.
The information presented below relating to each of the segments is, unless otherwise stated, provided before deduction of intra-group transactions. In addition, changes shown below are calculated on the basis of information in thousands, despite being shown rounded in millions.
1.1.1 ACTIVITY AND OPERATING PROFITABILITY OF THE GROUP
1.1.1.1 Principal operating results
The following table sets forth France Telecom’s revenues, operating income before depreciation and amortization and before amortization of actuarial adjustments in France Telecom’s early retirement plan (“operating income before depreciation and amortization”), operating income and the measure of operating income before depreciation and amortization less CAPEX (investments in tangible and intangible assets excluding UMTS/GSM licenses) for the years ended December 31, 2004, 2003 and 2002.
Revenues, operating income, the measure of operating income before depreciation and amortization less CAPEX and changes in working capital requirements (trade) are management indicators which France Telecom uses to evaluate the operating performance of the Group and its divisions and on which it bases the performance reviews of Group executives and division managers. The measure of operating income before depreciation and amortization less CAPEX is calculated to permit better evaluation of the efforts of operating divisions on the basis of investments in tangible and intangible assets excluding non-recurring investments (UMTS/GSM licenses) and investments financed through capital leases (“investments in tangible and intangible assets excluding UMTS/GSM licenses” or “CAPEX”).
The following table sets forth the principal operating statistics for France Telecom for the years ended December 31, 2004 and 2003 (see Note 4 of the Notes to the Consolidated Financial Statements).
On a historical basis, France Telecom’s consolidated revenues reached €47.2 billion in 2004, an increase of 2.2% compared to 2003. The change in revenues on a historical basis reflects the growth of the Group’s activities in 2004, particularly in wireless
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and Internet activities. The decline in revenues for fixed line telephony in France was largely contained in 2004, with the decrease limited to 0.4%. Conversely, the changes in the scope of consolidation affecting the Group’s revenues between 2003 and 2004 amounted to a decrease of €418 million following the sales of CTE Salvador on October 22, 2003, Orange Denmark on October 11, 2004, Menatel on September 25, 2004 and Casema on January 28, 2003. There were no significant additions to the scope of consolidation of France Telecom between 2003 and 2004. In addition, the negative effect of exchange rates on income amounted to €368 million, relating mainly to the US dollar, the zloty and the Egyptian pound, between the two periods.
Operating income before depreciation and amortization grew by 5.5% in one year reaching €18.3 billion in 2004. This growth was mainly the result of the strong increase in operating income before depreciation and amortization of wireless and domestic fixed line services in France. These beneficial effects were partially offset by the decrease of operating income before depreciation and amortization of other segments which were significantly affected by (i) withdrawals from the scope of consolidation, particularly in relation to international activities (mainly CTE Salvador), (ii) the reduced sales volume of Equant, which operates in a highly competitive market for global communication services for businesses and (iii) unfavorable exchange rate fluctuations for TP Group and Equant. The margin of operating income before depreciation and amortization increased 1.2 points from 37.5% in 2003 to 38.7% in 2004.
Operating income grew by 13.3%, reaching €10.8 billion, over the same period, amplifying the increase in operating income before depreciation and amortization, principally due to:
These factors fully offset the beginning of the depreciation of the UMTS licenses of Orange UK since March 1, 2004 (amounting to €272 million in 2004), and Orange France since April 1, 2004 (amounting to €27 million in 2004). Consequently, the margin of operating income over revenues increased by 2.3 points from 20.7% in 2003 to 23.0% in 2004.
The measure of operating income before depreciation and amortization less CAPEX increased by 7.5%, reaching €13.1 million as a result of growth in operating income before depreciation and amortization and the increase in investments in tangible and intangible assets excluding licenses being limited to 0.8% between 2003 and 2004.
In order to provide a basis of comparison with the results for 2004, information on a comparable basis at constant exchange rates are set forth for 2003. To this end, the actual results of the financial year ended December 31, 2004 are retained, while the results for the corresponding period of the previous year have been adjusted to provide, for comparable periods, financial information with comparable scopes of consolidation and exchange rates. This is achieved by applying the scope of consolidation for 2004 and the average exchange rate used for the 2004 income statement to the 2003 financial results.
The changes in the scope of consolidation were due almost entirely to withdrawals, including in particular the following:
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The following table sets forth the transition of figures on a historical basis to figures on a comparable basis for the 2003 financial year.
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The impact of exchange rate fluctuations on the calculation of figures on a comparable basis are as follows:
On a comparable basis, revenues increased by 4.1% in 2004, due mainly to significant increases in wireless activities (notably internationally) and Internet activities and, to a lesser extent, the increase recorded for international activities and TP Group. The increase in revenues largely offsets the decrease in revenues from fixed line services in France, which only fell by 0.3% in 2004, compared with 2.4% in 2003 on a comparable basis.
Operating income before depreciation and amortization increased by 7.4% and operating income increased 12.4%, highlighting the Group’s improved operating profitability in 2004. This growth resulted mainly from increases in wireless activities, above all internationally, as well as the improvement of profitability for fixed line services in France.
Thus, by focusing on growth sectors and by improving its operating profitability, the Group increased its operating income before depreciation and amortization margin by over one point to 38.7% in 2004. Excluding commercial expenses1, the ratio increased by 2 points to 51.6% in 2004 (see section 1.1.2.2 “Results of the ‘TOP’ operational improvements program”. The margin of operating income to revenues increased by 1.7 points from 21.3% in 2003 to 23.0% in 2004.
The increase in operating income before depreciation and amortization fully offsets the increase of investments in tangible and intangible assets (which increased by 3.1%), and the measure of operating income before depreciation and amortization less CAPEX rose by 9.2% during the period.
1.1.1.2 Principal net income and financial debt figures
The following table sets forth the principal figures relating to net income for the France Telecom Group for the years ended December 31, 2004, 2003 and 2002.
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Interest expense, net (not including interest expense for the perpetual bonds redeemable for shares (titres à durée indéterminée remboursables en actions or TDIRAs)) was €3,089 million in 2004, compared to €3,688 million a year earlier, an improvement of €599 million. This improvement was mainly due to the decrease of average net financial debt during 2004, which reduced interest expense by approximately €350 million. In addition, interest expense for the perpetual bonds redeemable for shares (TDIRAs) issued in connection with the MobilCom settlement was €308 million in 2004, compared with €277 million in 2003. This increase was due to the fact that in 2004, interest expense for the perpetual bonds redeemable for shares (TDIRAs) included in interest accrued during 2004 and the interest capitalized in 2003.
A net foreign exchange gain of €180 million was recorded in 2004, compared with a loss of €25 million in 2003, which resulted from the increase in value of the zloty compared to the euro (€126 million gain for TP Group), as well as from Orange Dominicana (€55 million gain) following the implementation during the second half of 2004 of the accounting guidelines for hyperinflation (see Note 2 of the Notes to the Consolidated Financial Statements).
Following the expense recorded for actuarial adjustments in France Telecom’s early retirement plan which was €148 million in 2004, compared with €199 million for 2003, operating income of integrated companies amounted to €7,459 million in 2004, compared to €5,365 million in 2003.
Other non-operating income amounted to €113 million in 2004, compared with an expense of €1,119 million for 2003. In 2004, this item included disposal gains and losses amounting to €644 million (mainly from STMicroelectronics, which contributed €241 million, and PagesJaunes following the listing of 36.93% of its share capital in July 2004 for €201 million net of expenses), in addition to a gain from results of €51 million and dividends of €25 million. During the second half of 2004, Equant’s short- and medium-term perspectives continued to decline compared to the first half, so a write-down of Equant’s tangible and intangible assets, on a pro rata basis in relation to net book value, was recorded in the amount of €483 million (€261 million for the group share). Other items included provisions for expenses and restructuring totaling €181 million, the payment of €51 million for the put option of TP SA shares from Kulczyk Holdings, expenses related to the exercise of Wanadoo purchasing coupons by France Telecom SA (which amounted to €44 million) a provision of €36 million for the depreciation of assets in the Ivory Coast, a sum excluding other provisions and writebacks, net of €295 million (see section 2.3.3 “Other non-operating income/(expense)”), and bond buyback losses with respect to Orange SA and its subsidiaries amounting to €28 million.
In 2003, other non-operating expenses amounted to €1,119 million. This item included disposal gains of €333 million, mainly related to sales of holdings of Telecom Argentina, CTE Salvador, Inmarsat, Sprint PCS, as well as real estate. Non-operating expenses mainly consisted of provisions and restructuring costs recorded by Orange and Equant, an adjustment of the provision for the Kulczyk put option, the depreciation of Noos, a cash payment for the perpetual bonds redeemable for shares, losses on the repurchases of France Telecom S.A. and Orange bonds, and expenses in connection with sales of receivables.
In 2004, the income tax liability amounted to €1,998 million, compared to a tax credit of €2,591 million a year earlier. In 2004, the France Telecom S.A. consolidated tax group was composed of the following entities: (i) Orange and its domestic subsidiaries, which were part of the Orange S.A. consolidated tax group before the public exchange offer (offre publique d’exchange) and (ii) subsidiaries belonging to the former Wanadoo S.A. consolidated tax group (excluding PagesJaunes and its domestic subsidiaries), with the merger of France Telecom S.A. and Wanadoo S.A. retroactive as of January 1, 2004. In 2004, the deferred income tax charge for the France Telecom consolidated tax group was composed of (i) the use of the Orange France tax loss carry forwards amounting to €1,056 million, (ii) the use of the tax loss carry forwards remaining from the former France Telecom consolidated tax group, amounting to €252 million, (iii) the loss of the Wanadoo S.A. and Wanadoo France tax loss carry forwards of €309 million, (iv) the release of provisions for impairment and discounting amounting to €1,038 million, and changes during the period of €281 million and (v) the impact of the change in the deferred tax rate on the tax loss carry forwards of Orange France and the former France Telecom consolidated tax group amounting to €230 million.
Employee profit-sharing amounted to an expense of €269 million in 2004, compared to an expense of €127 million in 2003.
Net income from integrated companies was €5,305 million in 2004, compared to €6,710 million for 2003.
For 2004, equity in net income from affiliates was not significant, amounting to a gain of €4 million, compared with a loss of €168 million for the previous year.
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Goodwill amortization charges (excluding exceptional amortization) amounted to an expense of €1,788 million in 2004, as compared to an expense of €1,677 million in 2003. This increase was mainly due to goodwill amortization charges related to the repurchase of minority interests in Orange and Wanadoo in 2003 and 2004.
During the first half of 2004, a total impairment by way of an exceptional amortization of Equant’s goodwill was recorded, amounting to a total expense of €519 million (€519 million for the group share). The decline of revenues, in addition to the uncertainties that develop in difficult market and competition circumstances such as those seen during the first half of 2004, resulted in a reassessment of the company’s prospects. In addition, during the second half of 2004, its short- and medium-term prospects continued to decline, as a result, a write-down of Equant’s tangible and intangible assets (on a pro rata basis in relation to the net book value) was recorded in the amount of €483 million (€261 million for the group share).
In 2003, provisions for exceptional amortization amounted to a total expense of €1,137 million and were recorded mainly for Wanadoo UK (formerly Freeserve) (€447 million), BITCO/Orange TA Company Ltd. (€287 million), QDQ Media (€245 million) and Mauritius Telecom (€143 million).
Net income of the consolidated group was €3,002 million in 2004, compared to €3,728 million for 2003.
As a result of minority interests amounting to €218 million in 2004, compared to €522 million in 2003, the Group’s consolidated net income was €2,784 million in 2004, compared with €3,206 in 2003.
France Telecom’s net financial debt (gross borrowings net of cash and cash equivalents and marketable securities – see Note 16 of the Notes to the Consolidated Financial Statements and section 4.1 “Evolution of Net Financial Debt”) was €43,938 million at December 31, 2004, compared to €44,167 million a year earlier. The slight decrease of €0.2 billion compared to December 31, 2003 mainly reflects the positive impacts of:
These favorable factors for the reduction of the level of indebtedness were partially offset in 2004 by:
The ratio of net financial debt to shareholders’ equity amounted to 2.80 at December 31, 2004, compared with 3.67 at December 31, 2003.
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1.1.2 THE “AMBITION FT 2005” PLAN
1.1.2.1 Principles
On December 4, 2002, France Telecom launched the “Ambition FT 2005” Plan, the second stage of which relates to the strengthening of the Group’s financial structure with the “15+15+15” plan:
These three initiatives were implemented in parallel, with the objective of achieving, by 2005, a ratio of net financial debt to operating income before depreciation and amortization of less than 2 giving the Group greater strategic and financial flexibility by the end of 2005. At December 31, 2004, this ratio was 2.41, compared to 2.55 at December 31, 2003 and 4.56 at December 31, 2002.
1.1.2.2 Results of the “TOP” operational improvements program
The following table shows the changes in operating expenses before depreciation and amortization and before amortization of actuarial adjustments in the early retirement plan (“operating expenses before depreciation and amortization” or “OPEX”; see section 1.6.5 “Glossary”) and investments in tangible and intangible assets (excluding GSM and UMTS licenses) (“CAPEX”) between 2003 and 2004, in the context of the implementation of the TOP Program.
Operating expenses before depreciation and amortization (operating expenses excluding labor costs and labor costs) by type of expense is an alternative presentation to operating expenses presented by destination (cost of services and products sold, selling, general and administrative expenses, and research and development expenses) – see Note 5 of the Notes to the Consolidated Financial Statements.
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The TOP program is intended to improve the Group’s operating performance. The goal is to maximize the Group’s performance in each of its activities (in relation to competing operators) by 2005 and produce, between 2003 and 2005, over €15 billion of free cash flow to be used for debt reduction.
Since the beginning of 2003, the Group has taken steps to achieve this goal by creating several programs, each implemented at the appropriate level according to the Group’s structure. In addition, group-wide projects involving multiple functions within the Group were established. Such programs relate to purchasing, network investments, general expenses, working capital requirements, information technology, research and development, communication expenses, logistics and real estate.
In order to accelerate the pace of progress, France Telecom launched during the second half of 2003 a growth initiative program called “TOP Line”, which consists of approximately 50 growth projects managed by the operating divisions and 13 group-wide programs aimed at developing and rolling out new services.
During the first half of 2004, in order to bolster the understanding of changing customer needs and accelerate the work done on the synergies of the various segments of the Group’s activities, the TOP program projects were reorganized into four group-wide projects centered on four themes: marketing and branding, the interaction of activity and customers, networks and information systems, and shared group functions.
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The implementation of the TOP program produced in 2004, as in 2003, significant free cash flow. Free cash flow excluding asset disposals1 generated in 2004 amounted to €2.9 billion. Despite being reduced in 2004 by the acquisition of minority interests in Wanadoo and Orange and the repayment of Equant’s CVRs for a total amount of €4.7 billion, free cash flow excluding asset disposals reflects the pursuit of improvement in operating profitability, better control over investment expenses relating to tangible and intangible assets excluding licenses, due to the TOP program, in addition to a reduction in interest expense (see section 1.4.4 “Liquidity and cash flows”). As a result of surpassing the projected results since 2003, France Telecom has been able to establish new margins for maneuvering, enabling it to emphasize its innovation effort and launch the plan to accelerate growth with the “TOP Line” program.
As compared with the 2.2% increase of revenues on a historical basis, operating expenses before depreciation and amortization remained relatively stable in 2004 with a limited increase of 0.3%.
During the launch phase of the TOP program, priority was granted to those projects which would provide the quickest results (reduction in general expenses including reduced recourse to external consultants and part-time workers, a new secondment policy, and a reduction of communication expenses). The projects then began a roll-out phase, which required the renewal of procedures, the systematic search and pooling of resources in addition to the implementation of synergies to concretely improve the Group’s operating profitability. Due to the effects of the “TOP” and “TOP Line” programs, operating expenses before depreciation and amortization have improved in 2004 (an increase of 2.2% on a comparable basis) compared with the growth of revenues (an increase of 4.1% on a comparable basis), thus enabling the Group to develop further maneuverability and better compete in growth sectors. As a percentage of revenues, the share of operating expenses before depreciation and amortization decreased by 1.2 points from 2003 to 2004 on both a comparable basis and a historical basis. Through improved control over operating expenses before depreciation and amortization as well as the renewed growth of revenues, the percentage of operating expenses before deprecation and amortization compared to revenues improved, on a historical basis, from 68% in 2002, to 62.5% in 2003 and 61.3% in 2004.
As an absolute value, the increase in operating expenses before depreciation and amortization recorded in 2004 is related to the increase in commercial expenses2 which reflects the Group’s efforts, in a heightened competitive environment, to retain its existing customer bases, to acquire new customers and to invest in growth. Excluding commercial expenses, operating expenses before depreciation and amortization remained stable (a gain of €14 million). On a historical basis, they continued their downward trend with a decrease of 2.1% (a gain of €493 million).
The transformation in procedures and the effects of the TOP program therefore benefit operating expenses before depreciation and amortization through improvement in the selection of expenses and pooling of resources at Group levels. Beyond the TOP program, which continued to be developed within the context of the first phase of the “15+15+15” Plan, France Telecom has solidified its goal of re-launching growth with the “TOP Line” program.
See also section 1.2.1.2.1 “Operating expenses before depreciation and amortization excluding labor costs”.
On a historical basis, investments in tangible and intangible assets excluding licenses increased by 0.8% in 2004, amounting to €5.1 billion.
On a comparable basis, the increase in investments in tangible and intangible assets excluding licenses was of 3.1% between 2003 and 2004. In line with the TOP Program, and in order to accelerate productivity and consistent with greater selectivity of investments, expenses for investments in tangible and intangible assets, excluding licenses, increased in areas with strong growth potential. This was particularly the case for investments relating to third-generation wireless networks (UMTS). On a
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comparable basis, investments relating to third-generation equipment and infrastructures increased by 8.6% in 2004 compared with 2003. Overall, second and third-generation wireless equipment and infrastructures amounted to an investment of €2.0 billion in 2004, an 8.5% increase from 2003.
The increase of tangible and intangible investments, excluding licenses, was nevertheless contained in 2004, which is explained in part by the effects of negotiations conducted within the framework of the “TOP Sourcing” project, which enabled purchases to be made at lower prices, and with greater selectivity of investments in tangible and intangible assets. Another key factor is the very significant impact of the major reductions of purchase prices for UMTS and ADSL equipment, within the context of a very rapid deployment of the UMTS network coverage in the United Kingdom and in France, compounded by the extremely rapid acceleration of ADSL coverage in France, due primarily to the “Innovative Departments” program encouraged by the Group and the roll-out of the “Very high speed Internet transmission for businesses” plan in the economic zoning areas (zones d’activité économiques). In the field of ADSL, the improvement in the penetration rate enables the Group to benefit from more widespread use of broadband equipment.
Due to the optimization of investments and to the positive impact of its purchase strategy, which is particularly sensitive to new technologies, France Telecom also accelerated the roll-out of its broadband networks (fixed and wireless) without increasing the level of its total expenses. This accounts for an increase of 88% in the number of ADSL lines in 2004, the launch by Orange of its third-generation services (UMTS) for the general public in France and the United Kingdom and the acceleration of the roll-out of UMTS and EDGE services in France and on other European wireless networks.
Investments in tangible and intangible assets excluding licenses accounted for 10.9% of revenues of the Group in 2004, in line with the stated objective of France Telecom for 2004. In 2003, the percentage was 11.0%.
See also section 2.1.6.1 “Investments in tangible and intangible assets, excluding GSM and UMTS licenses.”
On a historical basis, the measure of operating income before depreciation and amortization less CAPEX increased by €917 million between 2003 and 2004, reaching €13.1 billion in 2004.
On a comparable basis, the measure of operating income before depreciation and amortization less CAPEX rose by 9.2%, an increase of over €1.1 billion between the two periods. Other than the increase in revenues, this improvement was due to the Group’s close management of its operating expenses and investments in tangible and intangible assets excluding licenses.
The statement of consolidated cash flows showed the positive impact of a change in working capital requirements (which were €650 million in 2004) following a positive impact of €1,242 million in 2003. Under the influence of the project to reduce working capital requirements that was launched pursuant to the “TOP” plan, the positive change in working capital requirements amounted to €736 million in 2004, mainly because of the reduction of outstanding customer accounts of €561 million. The improvement of working capital requirements in 2004 comes in addition to the improvement already achieved in 2003 and amounts to a decrease of more than €2 billion over the past two years.
1.1.3 OUTLOOK
Having rapidly achieved reductions in operating expenses and optimization of investments, France Telecom developed the second phase of the TOP program with a view to generating structural gains in performance through the transformation of fundamental procedures and strengthening of Group synergies. France Telecom’s objectives through 2005 are supported by the joint pursuit of the “TOP” operational improvements program and the “TOP Line” growth acceleration program.
Thus, France Telecom confirms its objectives for 2005 (on the basis of French GAAP):
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To implement its profitable growth strategy in the changing environment of the telecommunications industry, France Telecom will principally rely on its ongoing transformation to achieve operational excellence. This is the purpose of the “TOP” program, which is not simply a program for the reduction of expenses, but rather a program seeking to improve the operational performance of France Telecom (more efficient work processes, functional excellence and customer service excellence), in addition to being a program for the in-depth transformation of France Telecom in order to implement the integrated operator strategy. Accordingly, France Telecom intends to rely on its portfolio of key assets, innovative potential and on strategic partnerships to succeed in implementing its integrated operator strategy and to accelerate its growth. During 2005, the Group’s priorities remain:
Furthermore, research and development expenses for the Group (research and development costs excluding depreciation and amortization, plus investments in tangible and intangible assets related to research and development) as a percentage of revenues of the Group are projected to reach 1.5% in 2005 (compared to 1.3% in 2004 and 1.1% in 2003).
With respect to wireless technology in France, pursuant to the commitments made by Orange for the renewal of its GSM license in March 2004, the goal is to achieve by 2007 market coverage of 100% of the 36,000 communities and major transport hubs. In addition, Orange will supplement its UMTS technology with EDGE technology, which should result in complementary broadband coverage by spring 2005 for 85% of the population.
With respect to ADSL, total investments should reach €700 million for the period 2003 to 2005. Moreover, in January 2004, pursuant to the “Broadband for all” project commenced in June 2003, France Telecom announced a new voluntary initiative (the “Innovative Departments” charter) to accelerate and broaden the roll-out of broadband services in France. The project obtained the support of the majority of French regions (départements) following the signing of 70 agreements during 2004. Having reached its objective of 90% broadband coverage by the end of 2004, France Telecom intends to increase the coverage to 96% by the end of 2005, and by the end of 2006 100% of telephone switching centers in France should have broadband capacities. Finally, before the end of the first half of 2005, ADSL 2+ will be rolled out over France Telecom’s entire domestic broadband network, increasing the transfer rate to 16 megabits per second or more in the best circumstances.
In addition, efforts to accelerate and extend the Very High Speed (“Trés Haut Débit”) service plan for businesses will amount to an additional €250 million in France Telecom’s investments between 2005 and 2007, resulting in almost €1 billion in supplemental investment for broadband and over €3 billion in combined investments made by France Telecom for its networks in France over the period 2005-2007.
France Telecom has established the following objectives for 2006-2007 on the basis of French GAAP:
France Telecom announced on February 10, 2005 that it had signed a definitive agreement with Equant for the acquisition by France Telecom of all of the assets and liabilities of Equant, its 54.1% subsidiary specialized in global communications services for businesses, for a total aggregate consideration of €578 million for the portion not already held by France Telecom. The agreement’s final terms have been approved at France Telecom’s Board of Directors meeting of February 9, 2005, during which an independent expert attested to the fairness, from a financial point of view, of the terms of the offer for the Equant minority shareholders. At this meeting, the preliminary report from the college team comprised of one Dutch and one French legal expert was presented and confirmed, after carrying out the requisite due diligence, the conformity of the transaction with the
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corporate governance rules, applicable regulations (particularly securities regulations) and the corporate interests of France Telecom and Equant.
The acquisition would be followed by a distribution of the purchase proceeds to Equant’s shareholders.
The Transaction remains subject to certain conditions, including approval by Equant’s shareholders at an Extraordinary General Meeting. France Telecom has agreed to vote at this shareholders’ meeting in favor of the transaction, which will require a simple majority for approval. In view of these conditions, the transaction should be completed and distributions paid to shareholders no sooner than May 2005. The shares of Equant NV will subsequently be delisted from the Eurolist market of Euronext Paris and NYSE, and Equant NV will be liquidated.
The distribution to Equant’s shareholders will not be subject to withholding tax in the Netherlands.
France Telecom believes that this transaction, if completed, will provide it with the opportunity to accelerate the implementation of its integrated operator strategy in the business services market, and constitutes a long-term response to the structural challenges facing Equant as a stand-alone entity.
Equant is facing a very challenging 2005.
In order to ensure its recovery and future success, Equant has defined its immediate priorities, strengthened its management team and implemented a new structure and strong company values to stimulate the commitment and ambition of its employees.
Three priorities have been determined: a drastic reduction in cash flow consumption, the development of profitable growth and the development of partnerships. These priorities are implemented by a strengthened management team including a new CEO (Chief Executive Officer), a new CFO (Chief Financial Officer), and a COO (Chief Operating Officer) dedicated to the operating performance of the company. Additional positions were also created: Global Sourcing, Cash Generation and Sales Efficiency.
Equant has implemented a two tier structure with two business divisions (Equant Network Services and Equant Solutions & Services) in addition to four sales channels (Americas, Europe, Middle-East and Africa, Asia Pacific and indirect channels), reporting directly to the CEO.
Strong corporate values have been established to stimulate the commitment of employees: team spirit and solidarity, transparency, speed of delivery, commitment to the achievement of established goals, and ambition.
These priorities are designed to bring real benefits to Equant’s customers: a financially stable supplier, strengthened customer service and innovative solutions.
On February 10, 2005, France Telecom sold 22,303,169 shares, or 8% of the share capital of PagesJaunes Group (that it held directly) to institutional investors through an accelerated placement for a price of €440.5 million, as a result of which France Telecom’s holding of PageJaunes Group was reduced to 54%.
The financial goals of PagesJaunes are:
The goal with respect to a distribution should not be interpreted as a commitment by PagesJaunes Group; any future dividends will depend on PagesJaunes Group’s results, its financial position and any other factor that the Board of Directors and PagesJaunes Group’s shareholders may deem appropriate.
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1.2. PRESENTATION OF THE FINANCIAL YEARS 2004 AND 2003
1.2.1 FROM REVENUES TO OPERATING INCOME AND CAPITAL EXPENDITURE OF THE GROUP
Following the launch of the “Ambition FT 2005” Plan on December 4, 2002 (see section 1.1.2 “The ‘Ambition FT 2005’ Plan”), France Telecom set targets related in particular to the TOP operational performance improvement program. The anticipated results of the program have led the Group to analyze operating expenses before depreciation and amortization on the basis of type of expense: (i) external charges, operating expenses before depreciation and amortization excluding labor costs, other expenses and (ii) labor costs (see section 1.6.5 “Glossary”).
The following table sets forth the restatement of revenues to operating income and details (by type of expense) France Telecom’s total operating expenses (see Note 5 of the Notes to the Consolidated Financial Statements) for the years ended December 31, 2004 and 2003.
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The following table sets forth the transition of operating expense figures on a historical basis to figures on a comparable basis for the 2003 financial year.
1.2.1.1 Revenues
France Telecom’s revenues for 2004 amounted to €47.2 billion, increasing 2.2% on a historical basis compared with the preceding year. The increase in revenues on a historical basis is affected by (i) the negative impact of exchange rate fluctuations of €368 million in 2004, of which €119 million related to the Polish zloty and €263 million to the US dollar. In addition, the negative impact of changes in the scope of consolidation and other items amounted to €418 million in 2004. This was mainly due to the impact of the sales of CTE Salvador on October 22, 2003, Orange Denmark on October 11, 2004, Menatel on September 25, 2003 and Casema on January 28, 2003.
On a comparable basis, revenues in 2004 increased by 4.1% compared with 2003. The increase of consolidated revenues was driven by the growth of Orange (increasing by 10.4%) and Wanadoo (increasing by 9.9%). The sustained growth of wireless and Internet activities largely offsets a contained decrease of revenues from fixed line services in France (a decrease of 0.3%). TP Group’s activities increased slightly (1.6%), and those of the other subsidiaries within the Other International segment increased by 6.0%, while global services provided by Equant declined by 1.2% on a comparable basis.
The total number of customers of France Telecom and its controlled companies amounted to 124.9 million at December 31, 2004, an increase of 6.7% on a historical basis and 7.4% on a comparable basis compared with a year earlier. The number of additional customers between December 31, 2004 and December 31, 2003 amounted to approximately 8 million on a historical basis (almost 2.6 million during the first half of 2004) and was due principally to wireless services, with almost 7.1 million additional active clients (2.1 million during the first half of 2004). The Internet recorded slight growth of almost 0.304 million active clients. Fixed line services recorded an increase of 0.436 million customers, mainly from subsidiaries in the “Other International” segment.
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The following table sets forth, for the periods ended December 31, 2004 and 2003, the Group’s revenues by segment, before elimination of inter-segment transactions.
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1.2.1.2 From revenues to operating income before depreciation and amortization
1.2.1.2.1 Operating expenses before depreciation and amortization excluding labor costs
Operating expenses before depreciation and amortization excluding labor costs amounted to €20,022 million in 2004, compared to €19,579 million in 2003 on a historical basis and €19,181 on a comparable basis. The breakdown of such expenses by item is as follows:
On a historical basis, operating expenses before depreciation and amortization, excluding labor costs increased by 2.3% between 2003 and 2004.
On a comparable basis with 2003, operating expenses before depreciation and amortization, excluding labor costs increased by 4.4%. This increase was mainly due to the increase of commercial expenses (11.6% on a comparable basis), which reflects the Group’s efforts, in a highly competitive environment, to develop customer loyalty in the existing customer base, acquire new customers and invest in growth.
Other external expenses increased slightly on a comparable basis to 3.3%, while revenues grew 4.1%, reflecting efforts to control expenditure within the framework of the TOP plan (see section 1.1.2.2 “Results of the ‘TOP’ operational improvement program”).
Not including commercial expenses, total operating charges excluding labor costs, expressed as a percentage of revenues improved slightly from 30.3% in 2003 to 29.6% in 2004 on a comparable basis.
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1.2.1.2.2 Labor costs
Labor costs included in the determination of operating income before depreciation and amortization in 2004 are net of capitalized labor costs. Labor costs amounted to €8,874 million in 2004 compared to €9,239 million in 2003 on a historical basis, and €9,099 million on a comparable basis.
The following table presents, for the years ended December 31, 2004 and 2003, the calculation from personnel expenditure to labor costs:
Labor costs do not include statutory employee profit-sharing or charges relating to discounting or changes in actuarial assumptions relating to the early retirement plan.
The following table presents, for the years ended December 31, 2004 and 2003, the distribution of the Group’s labor costs among France Telecom S.A., its domestic subsidiaries and its international subsidiaries:
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The following table presents, for the years ended December 31, 2004 and 2003, the average number of Group employees (full-time equivalent) in France Telecom S.A., its domestic subsidiaries and its international subsidiaries:
The following table presents, for the years ended December 31, 2004 and 2003, the number of Group employees in France Telecom S.A., its domestic subsidiaries and its international subsidiaries:
The following analysis is based on labor costs for the periods ended December 31, 2004 and 2003:
Changes in the scope of consolidation accounted for the decrease of 3,056 full-time equivalent employees, principally due to the sale of CTE Salvador (2,005 employees) and Menatel (297 employees);
On a comparable basis, the decrease in the average number of full-time equivalent employees of the Group essentially results from the TP Group (6,471 average full-time equivalent employees), France Telecom S.A. (4,261 average full-time equivalent employees), the Other International segment (959 average full-time equivalent employees) and Equant (462 average full-time equivalent employees);
This 2.5% decrease on a comparable basis can be explained as follows:
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The average number of employees of France Telecom S.A. decreased by 3.8% between 2004 and 2003 on a comparable basis. The decrease was due mainly to employee departures linked to France Telecom’s early retirement plan. Since the implementation of the early retirement plan in September 1996, 30,206 employees have chosen to accept early retirement under the plan (excluding other pre-existing early departure programs). Between 2003 and 2004, France Telecom S.A. experienced 4,195 departures in early retirement, 2,192 definitive departures and 711 moves to employment in the public sector.
France Telecom S.A.’s labor costs decreased by 1.3% between 2004 and 2003 on a historical basis. This decrease was due mainly to a reduction in the headcount, partially offset by the increase in salaries due to general public sector measures, as well as the increase in the base salaries of employees under a collective bargaining agreement and the inclusion of the labor costs of Wanadoo and Cofratel following their merger into France Telecom S.A.
In 2004, the 8.5% decrease in labor costs of domestic subsidiaries was mainly due to the 10.7% decrease of the average headcount, which amounts to a decrease of 2,014 full-time equivalent employees (on a comparable basis).
The 8.5% decrease in the average number of employees in the international subsidiaries between 2004 and 2003 on a comparable basis was mainly due to the reduction of the headcount of TP Group (6,471 full-time equivalent employees), the subsidiaries of the Other International segment (959 full-time equivalent employees), mainly from Côte d’Ivoire Télécom in the Ivory Coast (272 employees), JTC in Jordan (251 employees) and FTM Lebanon (238 employees), in addition to those from Equant (462 employees).
Labor costs for the international subsidiaries decreased by 1.9% on a comparable basis. This limited decrease was principally due to the increase of the average unit cost (i) by 3.7% for TP Group as a result of both the increase in salaries and the average cost of personnel entering being higher than the average cost of personnel exiting, which reflects the higher level of skill of the recruited personnel and (ii) by the 1.4% increase in the average unit cost at Equant.
1.2.1.3 Operating income before depreciation and amortization
The France Telecom Group’s operating income before depreciation and amortization amounted to €18,261 million in 2004, compared with 17,303 million in 2003, an increase of 5.5% on a historical basis.
On a comparable basis, operating income before depreciation and amortization was €16,998 million in 2003. The increase on a comparable basis of the operating income before depreciation and amortization was therefore 7.4% in 2004 compared with 2003.
The margin rate, calculated by expressing operating income before depreciation and amortization as a percentage of revenues, increased from 37.5% in 2003 (on both a historical basis and a comparable basis) to 38.7% in 2004.
1.2.1.4 From operating income before depreciation and amortization to operating income
1.2.1.4.1 Depreciation and amortization (excluding goodwill)
Depreciation and amortization (excluding goodwill) decreased by 1.3% on a historical basis, reaching €7,437 million in 2004, compared with €7,538 a year earlier.
This decrease corresponds mainly to exchange rate fluctuations (primarily relating to the zloty and the US dollar), the positive impacts of which amount to €93 million for depreciation and amortization.
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Changes in the scope of consolidation and other affected depreciation and amortization positively for €79 million, mainly due to the sale of CTE Salvador (€60 million).
On a comparable basis, depreciation and amortization were virtually stable (increasing by 1.0%). The decrease in depreciation and amortization of the Fixed Line, Distribution, Networks, Large Customers and Operators segment resulting from the decline of investments in the years prior to 2004, offset the increase in the Orange segment, particularly in the United Kingdom, for which the impact of the amortization of the Orange UK UMTS license has been recorded since March 1, 2004. Amortization is occurring over 18 years and represents an expense of €27.2 million per month. The amortization of the Orange France UMTS license began on April 1, 2004 and amounts to an expense of €3 million per month, over the course of 17 years and five months (see Note 9 of the Notes to the Consolidated Financial Statements).
1.2.1.4.2 Amortization of actuarial adjustments in the early retirement plan
In 2004, the amortization of actuarial adjustments in the early retirement plan is no longer included on the income statement pursuant to the application of Recommendation R-03-01 of April 1, 2003 of the National Accounting Council, which is applicable from January 1, 2004 and relates to accounting and valuation methods for pension commitments and similar benefits. The actuarial differences in the early retirement plan still to be amortized at December 31, 2003 were included in shareholders’ equity at January 1, 2004 for an amount (net of taxes) of €325 million. In 2003, amortization of actuarial adjustments amounted to an expense of €211 million on a historical basis.
1.2.1.5 Operating income
Operating income for the France Telecom Group amounted to €10,824 million during 2004, compared with €9,554 million during 2003, an increase of 13.3% on a historical basis. This growth reflects the improvement of operating income before depreciation and amortization, the absence of amortization of actuarial adjustments in the early retirement plan in 2004, and the impact of the decrease in depreciation and amortization.
On a comparable basis, operating income amounted to €9,632 million in 2003. The increase of operating income on a comparable basis was 12.4% in 2004.
The margin rate, calculated by expressing operating income as a percentage of revenues, increased from 20.7% in 2003 (21.3% on a comparable basis) to 23.0% in 2004.
1.2.1.6 Capital expenditures
The following table sets forth capital expenditure for the years ended December 31, 2004 and 2003:
1.2.1.6.1 Investments in tangible and intangible assets excluding UMTS/GSM licenses
Investments in tangible and intangible assets excluding GSM and UMTS licenses increased by 0.8% on a historical basis and 3.1% on a comparable basis.
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This increase reflects the growth of investments, particularly in the Orange segment, the Fixed Line, Distribution, Networks, Large Customers and Operators segment, and the Wanadoo segment, which offset the decreases in the TP Group segment and the Equant segments, in addition to the effects of the exchange rate fluctuations (a decrease of €61 million) and variations of the scope of consolidation such as the sales of CTE Salvador (a decrease of €14 million), Orange Denmark (a decrease of €14 million) and Wanadoo Editions (decrease of €9 million).
In 2004, investments in tangible and intangible assets excluding GSM and UMTS licenses amounted to 5,127 million, compared to €5,086 million in 2003 on a historical basis and €4,972 million on a comparable basis. The breakdown of investments by segment is as follows:
The following table breaks down investments in tangible and intangible assets:
Investments in tangible and intangible assets excluding GSM and UMTS licenses are detailed below. See section 1.2.2 “Analysis of Operating Income and Investments in Tangible and Intangible Assets by Segment.” See also section 1.1.2.2 “Results of the ‘TOP’ Operational Improvements Program”.
Investments related to the second and third-generation wireless networks increased by 8.5% during 2004 on a comparable basis. This increase is mainly due to the roll-out of the third-generation (UMTS) network and EDGE technology.
The 8.0% decrease of ADSL investments between 2003 and 2004 was due to a favorable “price effect” and the greater use of existing equipment.
The increase in investments in other networks, 12.8% on a comparable basis, relates mainly to renewal equipment and to investments relating to unbundling (local loop, technical environment).
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1.2.1.6.2 Acquisitions of UMTS and GSM licenses
In 2004, the Group’s investments include €8 million for the acquisition of wireless licenses, in respect of which €7 million corresponds to an extension of the DCS 1800 GSM license held by the Orange subsidiary in the Dominican Republic.
In 2003, no wireless licenses were acquired.
1.2.1.6.3 Financial investments
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1.2.2 ANALYSIS OF OPERATING INCOME AND INVESTMENTS IN TANGIBLE AND INTANGIBLE ASSETS BY SEGMENT
In order to better reflect the Group’s evolution and the structure of its operations among its various activities and subsidiaries, France Telecom has defined, as of June 30, 2003, the following six business segments: “Orange”, “Wanadoo”, “Fixed Line, Distribution, Networks, Large Customers and Operators”, “Equant”, “TP Group”, and “Other International”.
The following tables set forth the principal operating data by segment. The figures at December 31, 2004 and 2003 are provided in accordance with the new segmentation. The segment data set forth in the following sections, unless otherwise indicated, is presented before elimination of inter-segment transactions. The item “Elimination and Other” includes the elimination of inter-segment transactions and other non-material factors necessary for the reconciliation with the consolidated financial statements of France Telecom. In addition, the changes set forth below are calculated on the basis of data in thousands of euros, even though they are shown rounded to millions of euros.
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1.2.2.1 Orange Segment
The Orange segment includes mobile telephone services worldwide, in France and in the United Kingdom, except for mobile telephone services not contributed to Orange (principally Voxtel in Moldava, FTM Lebanon, and PTK Centertel in Poland).
At December 31, 2004, Orange’s controlled subsidiaries had 54.0 million customers.
Orange organizes its activities into four categories:
1.2.2.1.1 Operating indicators for the Orange segment
The table below presents the main operating indicators of the Orange segment for the years ended December 31, 2004 and 2003:
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The following table sets forth the transition of figures for the Orange segment on a historical basis to figures on a comparable basis for the 2003 financial year. The impacts concern the sale of Orange Denmark, sold on October 11, 2004 (with effect from October 1, 2003 on a comparable basis), a change in accounting method that occurred in 2004, as well as exchange rate fluctuations:
The exchange rate effects on the information on a comparable basis are as follows:
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1.2.2.1.2 Revenues of the Orange segment
The following table sets forth the revenues of the Orange segment for the periods ended December 31, 2004 and 2003:
On a historical basis, the Orange segment’s revenues increased by 9.6% from the year ended December 31, 2003 as compared to the year ended December 31, 2004. This growth was partly offset by the negative impact of exchange rate fluctuations, particularly from revenues in Egyptian pounds and US dollars. The exchange rate fluctuations in pound sterling generated a positive impact in 2004.
On a comparable basis, the Orange segment’s revenues reached €19.7 billion for the year ended December 31, 2004, an increase of 10.4% as compared to the year ended December 31, 2003. Network revenues (see the definition in Section 1.6.5 “Glossary”) grew by 10.3% on a historical basis, and 10.8% on a comparable basis, due to the increase in the number of customers (54.0 million at December 31, 2004). This growth, reflecting the positive impacts of the programs for the integration and roll-out of the Orange brand implemented in 2003, was 11.1% for the year ended December 31, 2004. In addition, ARPU, average revenue per user, (see the definition in section 1.6.5 “Glossary”) also had a favorable impact, particularly in France and the United Kingdom, as a result of the development of “non-voice” services (see the definition in Section 1.6.5 “Glossary”), which increased by 26.0%, representing 14.6% of network revenues during 2004, compared to 12.8% on a comparable basis for 2003.
1.2.2.1.3 Operating income before depreciation and amortization, operating income, and investments in tangible and intangible assets excluding licenses
The Orange segment’s operating income before depreciation and amortization grew by 14.2% on a historical basis, reflecting the strong growth in margin in the principal markets, despite a general environment of intensified competitive pressure. On a comparable basis, the Orange segment’s operating income before depreciation and amortization experienced growth of 15.9% from the year ended December 31, 2003 as compared to the year ended December 31, 2004, reaching €7,515 million for 2004, compared to €6,484 million for 2003. On the same basis of figures on a comparable basis, the margin rate of operating income before depreciation and amortization compared to revenues increased from 36.4% on December 31, 2003 to 38.2% on December 31, 2004.
On a historical basis, operating income recorded growth of 12.0%, reaching €4,778 million for the year ended December 31, 2004. On a comparable basis, this growth was 13.8% and reflected the improvement in the segment’s operating profitability, despite the increase in depreciation and amortization of the tangible and intangible fixed assets due to the beginning of the third-generation license and network (UMTS) depreciation in France and the United Kingdom from the second quarter of 2004 (see Note 9 of the Notes to the Consolidated Financial Statements).
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Excluding UMTS and GSM licenses, the Orange segment’s investments in tangible and intangible assets increased by 4.1% on a comparable basis (3.0% on a historical basis), reaching €2,433 million for the year ended December 31, 2004.
1.2.2.1.4 Orange France component
1.2.2.1.4.1 Operating indicators of the Orange France component
The following table presents the main operating indicators of the Orange France component for the periods ended December 31, 2004 and 2003:
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1.2.2.1.4.2 Revenues of the Orange France component
The following table presents the revenues and operating data for the Orange France component:
Revenues increased by 7.7% for the year ended December 31, 2004 on a historical basis and by 8.5% on a comparable basis. This growth was principally due to the 9.4% increase in network revenues, due to the significant increase in the number of customers (4.5%, reaching 21.2 million at the end of December 2004) and growth of ARPU. In 2004, ARPU increased by 3.7%, rising from €379 to €393. This improvement resulted in particular from the following factors:
ARPU increased despite the impact of a decrease of approximately 12.5% in the price of calls made from fixed line networks to the Orange France network, which occurred in January 2004.
In 2004, as in previous years, billing between mobile operators in France was conducted on the basis of the “Bill & Keep” arrangement.
“Bill & Keep” (literally “billed and kept”) refers to the method by which a mobile operator bills the subscriber who makes the call for the entire amount of the outgoing call towards another mobile subscriber (the called party), without paying back a share of the payment for access to the terminal portion of the other mobile operator’s network.
The “Bill & Keep” system was terminated on January 1, 2005.
Discontinuing use of the “Bill & Keep” arrangement will lead to an increase in the Orange France component’s revenues and to an increase in call termination charges, for a virtually equivalent amount.
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1.2.2.1.4.3 Operating income before depreciation and amortization, operating income, and investments in tangible and intangible assets excluding licenses for the Orange France component
Total subscriber acquisition costs (see section 1.6.5 “Glossary”) increased by 18.2% from 2003. Subscriber retention costs (see section 1.6.5 “Glossary”), resulting from expenses incurred to maintain the client base in a competitive market, decreased by 11.7%, due to a reduction in the volume of customers upgraded to other offerings.
Subscriber acquisition and retention costs accounted for 11.0% of revenues during 2003 on a historical basis (11.7% on a comparable basis) and 11.2% during 2004. The policy to migrate prepaid customers to contracts was reflected in the decrease of the churn rate (see section 1.6.5 “Glossary”) for contract clients. The churn rate for contract customers decreased from 11.5% for the year ended December 31, 2003 to 10.5% for the year ended December 31, 2004 while the churn rate for prepaid customers increased from 27.2% to 31.3%.
Overall, operating expenses before depreciation and amortization went from €4,534 million in 2003 to €4,679 million, an increase of 3.2% on both a historical and a comparable basis, and revenues increased by 8.5% on a comparable basis (7.7% on a historical basis).
Operating income excluding depreciation and amortization for Orange France grew by 13.7% on a historical basis, rising from €3,450 million to €3,923 million for the year ended December 31, 2004. On a comparable basis, it increased by 15.5%. This strong growth reflects the improvement in operating profitability achieved by the Orange France component, with the margin rate of operating income before depreciation and amortization compared to revenues increasing from 43.2% at December 31, 2003 on a historical basis (42.8% on a comparable basis) to 45.6% at December 31, 2004.
The amortization of assets has increased by 17.5% on a comparable basis. This increase is largely a reflection of the depreciation of the third-generation (UMTS) license and network from April 1, 2004. The license amounts to €629 million and will depreciate over 17 years and 5 months. The depreciation costs for the year ended December 31, 2004 were €27 million (see Note 9 of the Notes to the Consolidated Financial Statements).
Operating income increased by 12.7% on a historical basis, increasing from €2,748 million for the year ended December 31, 2003 to €3,099 million for the year ended December 31, 2004. On a comparable basis, operating income grew by 15.0%. This strong growth reflects the improvement in operating profitability achieved by the Orange France component with the margin rate of operating income as a proportion of revenues increasing from 34.4% at December 2003 on a historical basis (34.0% on a comparable basis) to 36.0% at December 2004.
Excluding UMTS and GSM licenses, the investments in tangible and intangible assets recorded an increase of 22.9%, reaching €1,046 million for the year ended December 31, 2004, compared to €851 million for the year ended December 31, 2003 (both on a historical and a comparable basis). This growth reflects the beginning of the roll-out of the third-generation (UMTS) network, as well as the intensification of the existing network in the territories partially or not covered by Orange France.
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1.2.2.1.5 Orange UK component
1.2.2.1.5.1 Operating indicators for the Orange UK component
The following table sets forth the main operating indicators of the Orange UK component at December 31, 2004 and 2003:
1.2.2.1.5.2 Revenues of the Orange UK component
The following table sets forth revenues of the Orange UK component as well as operating data. The data on a comparable basis for 2003 include the impact of exchange rate fluctuations of the pound sterling:
On a historical basis, revenues increased by 5.5% at December 31, 2004, principally as a result of the positive impact of the pound sterling exchange rate fluctuations .
On a comparable basis, the 3.5% increase of revenues was mainly attributable to the 4.3% increase of network revenues.
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The sustained growth of network revenues is the result of:
On June 1, 2004, the Office of Communications (“OFCOM”), the telecommunications regulatory authority in the United Kingdom, issued its decision requesting Orange, T-Mobile, O2 and Vodafone to lower their call termination rates for wireless calls. The wireless operators must ensure that their call termination rates do not exceed the average price of 6.31 pence per minute (for Orange and T-Mobile) and 5.63 pence per minute (for O2 and Vodafone) for the period from September 1, 2004 to March 31, 2006. The reduction in the rate will amount to a decrease of approximately 32% in termination call rates for the mobile network (incoming traffic).
1.2.2.1.5.3 Operating income Before Depreciation and amortization, operating income, and investments in tangible and intangible assets excluding licenses of the Orange UK component
On a comparable basis, customer subscriber costs increased by 26.0% in 2004. Subscriber retention costs, aimed at maintaining the number of customers in a competitive market, increased 40.1%. As a percentage of revenues, subscriber acquisition and retention costs increased from 13.6% at December 31, 2003 to 17.2% at December 31, 2004.
The 22.6% increase in the churn rate at December 31, 2003 (compared with 25.4% at December 31, 2004), reflects a heightened competitive market in 2004 compared to the previous year, due to the increase in the termination rate of prepaid offers (from 26.5% in 2003 to 30.5% in 2004). The termination rate of contract packages, however, remained virtually stable (from 23.5% in 2003 to 23.9% in 2004).
Overall, operating expenses before depreciation and amortization amounted to €4,144 million during 2004, compared with €3,846 million at the end of December 2003, an increase of 7.7% on a historical basis (5.7% on a comparable basis).
Operating income before depreciation and amortization increased by 1.1% on a historical basis. On a comparable basis it decreased 0.9%, reaching €1,993 million at December 31, 2004 compared with €2,012 million at December 31, 2003. On the same comparable basis, the margin of operating income before depreciation and amortization compared to revenues amounted to 32.5% at December 31, 2004 and 33.9% at the end of 2003.
On a comparable basis, operating income for the Orange UK component decreased by 25.7% (24.1% on a historical basis) reaching €939 million at December 31, 2004, compared with €1,264 million at December 31, 2003. This decline reflects the decrease of operating income before depreciation and amortization combined with the growth of depreciation and amortization of fixed assets.
Depreciation and amortization increased by 40.7% on a comparable basis (43.5% on a historical basis). The increase is related principally to the beginning of the depreciation of the third-generation UMTS network and license since March 1, 2004. The UMTS license is depreciated over a residual period of 18 years, on a straight-line basis, and depreciation costs at December 31, 2004 were €272 million (see Note 9 of the Notes to the Consolidated Financial Statements).
On a historical basis, investments in tangible and intangible assets excluding GMS and UMTS licenses amounted to €754 million at December 31, 2003, compared with €573 at December 31, 2004, a decrease of 24.0%.
On a comparable basis, the decrease amounted to 25.4% and mainly corresponds to (i) a decrease in investment expenses during 2004, following a first phase of significant investments during 2003 and (ii) the decline in capital expenditures on third-generation (UMTS) equipment and infrastructures.
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Table of ContentsANALYSIS OF THE FINANCIAL SITUATION AND RESULTS
1.2.2.1.6 Rest of World component
1.2.2.1.6.1 Operating indicators of the Rest of World component
The table below sets forth the operating indicators of the Rest of World component at December 31, 2003 and 2004. The data on a comparable basis for 2003, presented below takes into account the impact of exchange rate fluctuations, particularly with regard to the Egyptian pound, the American dollar and the Dominican peso (in particular rate fluctuations following implementation of the hyperinflation accounting method during the second half of 2004). Changes in the scope of consolidation were related to the sale of Orange’s subsidiary in Denmark, sold on October 11, 2004 with effect from October 1, 2003, in the consolidated financial statements.
1.2.2.1.6.2 Revenues of the Rest of World component
The following table sets forth revenues and the number of customers for the Orange Rest of World component.
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Table of ContentsANALYSIS OF THE FINANCIAL SITUATION AND RESULTS
On a historical basis, revenues increased by 18.1%. On a comparable basis, revenues increased by 23.6% at December 31, 2004, which reflects the 23.5% increase of in network revenues.
This largely reflected the 26.9% increase (on a comparable basis) of the number of active customers, which reflected the roll-out of the Orange brand in 2003. Since December 31, 2003, the number of subscribers has increased by 3.9 million, principally in Romania, Egypt, Slovakia and the Netherlands.
The growth on a comparable basis of 23.6% of the Orange Rest of World component’s revenues is related to the results achieved in Belgium, Romania, the Netherlands and Egypt.
In Belgium, revenues grew by 15.2%, reaching €1,344 million at December 31, 2004, from €1,167 million at December 31, 2003 (on both a historical and comparable basis). ARPU increased by 5.8% compared to 2003, reaching €440 at December 31, 2004. The number of customers for the Mobistar group increased by 8.8% (totaling 2.8 million customers) during 2004.
In the Netherlands, revenues increased by 27.3% (on both a historical and comparable basis), reaching €592 million at December 31, 2004. ARPU declined by 13.4% compared to 2003, amounting to €348 at December 31, 2004. The number of Orange Netherlands customers increased by 28.3% (reaching 1.7 million customers) at December 31, 2004.
The sale of Orange’s subsidiary in Denmark was completed on October 11, 2004. Between the first nine months of 2004 and the first nine months of 2003, Orange Denmark’s revenues increased by 3.6%, reaching €202 million at September 30, 2004 compared with €195 million at September 30, 2003.
In Switzerland, revenues increased by 9.4%, reaching €834 million at December 31, 2004 on a comparable basis (an increase of 7.7% on a historical basis). ARPU was €683 at December 31, 2004, compared to €712 at December 31, 2003 (on a historical basis). The number of Orange Switzerland customers increased by 4.8% (reaching 1.1 million customers) at December 31, 2004.
In Romania, revenues increased by 47.0%, reaching €624 million at December 31, 2004 on a comparable basis (an increase of 33.6% on a historical basis). ARPU declined to €148 at December 31, 2004, compared to €169 at December 31, 2003, a decrease of 12.4% on a historical basis. The number of Orange Romania customers increased by 48.9% (reaching 4.9 million customers) at December 31, 2004. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||