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France Telecom 2006 Profit Falls; Dividend Maintained (Update4)

March 06, 2007

France Telecom SA (FTE), Europe's second-largest phone company, said 2006 profit dropped 28 percent after it wrote down the value of the U.K. mobile-phone business.

Net income fell to 4.14 billion euros ($5.4 billion euros) last year from 5.71 billion euros a year earlier, the company said in a statement today. The company said it will maintain its dividend for 2007 at last year's level, and Chief Financial Officer Gervais Pellissier repeated his forecast for the 2007 gross operating margin to drop less than 1 percentage point.

France Telecom lost about 1.5 million fixed-line customers last year in its home market and has relied on mobile-phone demand for growth. The Paris-based company says rival offers and slower demand weigh on growth abroad for Orange, the division that has powered earnings for three years.

``The results are average but the fears didn't materialize,'' said Alexandre Iatrides, an analyst at Richelieu Finance in Paris, which oversees $5 billion. ``There have been concerns about France Telecom's dividend. Those are now behind us.''

France Telecom shares rose 5 cents, or 0.3 percent, to close at 19.76 euros in Paris. The stock has slipped 5.7 percent this year.


France Telecom plans to pay a dividend of 1.20 euros a share for 2006, and intends to pay the same for 2007. The company raised its dividend in the past three years from 48 cents for 2004 and 1 euro for 2005.

Leaving the dividend unchanged ``is a message of confidence, fundamentally,'' Pellissier said on a conference call. ``We've chosen not to give guidance on sales'' and the company expects ``a very moderate growth, that means something at least comparable to what we did last year,'' he said.

France Telecom cut net debt to 42 billion euros at the end of December from 47.85 billion euros a year earlier. The company aims for net debt to be less than twice gross operating profit by the end of 2008.

The net income for last year was within the range of 4 billion euros to 4.2 billion euros the company announced on Feb. 1. France Telecom wrote down the value of its U.K., Polish and Dutch businesses by 2.8 billion euros.

``The final net result is in the middle of the range, which is reassuring,'' said Iatrides at Richelieu Finance. ``What's reassuring as well is the stabilization of sales and margin.''

`Near Stable' Margin

The company confirmed its targets ``against a backdrop of moderate growth in the group's major western European markets,'' France Telecom said. France Telecom expects a ``near stabilization'' of its gross operating margin this year, or a decline of 1 percentage point or less, Pellissier said.

France Telecom reported cash flow of 7.16 billion euros, beating a target for 7 billion euros, and repeated its target for 2007 cash flow of 6.8 billion euros.

The company has suffered from falling sales in its French and Polish fixed-line units, as well as slowdown for mobile division Orange in markets such as the U.K.

Net income on a comparable basis, which excludes one-time items, rose to 4.15 billion euros from 3.99 billion euros in 2005, France Telecom said.

One-time items included 3.3 billion euros of gains, mainly from the sale of France Telecom's remaining stake in PagesJaunes SA, compared with 1.8 billion euros a year earlier. The items also included the 2.8 billion-euro charge to cut the value of goodwill and assets, compared with 500 million euros in 2005.

Amena Acquisition

France Telecom said Feb. 1 gross operating profit, comparable to earnings before interest, tax, depreciation and amortization, rose 6.3 percent to 4.4 billion euros in the quarter ended Dec. 31 from 4.14 billion euros a year earlier.

Fourth-quarter gross operating profit swelled to 33.2 percent of sales from 32.2 percent a year earlier. The full-year gross operating margin fell 1.4 percentage points to 35.9 percent, in line with a forecast decline of 1 percentage point to 2 percentage points.

France Telecom faced ``lower-than-expected growth in mature markets and sustained competition in the markets in which we operate,'' Chief Executive Officer Didier Lombardsaid at a press meeting in Paris today.

Sales in the quarter rose 3.2 percent to 13.3 billion euros as the purchase of Spanish mobile-phone company Amena helped lift wireless revenue. The French company acquired 80 percent of Amena in November 2005.

`Becoming Tough'

Measures by national regulators to cut call-termination rates shaved about 600 million euros off sales for the mobile business in 2006. The effect of regulatory measures will be ``in the same order of magnitude'' this year, Pellissier said in an interview.

``We have to fight either to decrease our costs or to increase our business elsewhere to offset this regulatory cut,'' Pellissier said. ``There is still good growth in mobile, driven by the emerging markets.''

Full-year gross operating profit in France Telecom's wireless unit, called Personal, rose 14 percent to 9.69 billion euros, bolstered by the Spanish acquisition. In the fixed-line unit, called Home, profit on that basis fell 3.6 percent to 7.27 billion euros.

Pellissier said the company has no plans to sell its mobile business in the Netherlands, after Dow Jones Newswires reported in February that France Telecom is considering the sale of the unit.

``We have not made a decision on the sale of the business, but it is not ruled out,'' he said. ``Sales of assets will happen in the future.''

France Telecom hasn't yet decided whether it will bid for Deutsche Telekom AG (DTE)'s Spanish Internet business, said Belarmino Garcia, head of Orange Spain, at a press meeting.

``We know there is a process launched by Deutsche Telekom to sell the Internet business,'' Garcia said. ``We are studying the possibility,'' the executive said.

To contact the reporter on this story: Rudy Ruitenberg in Paris at

To contact the editor responsible for this story: Lars Klemming at

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