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12 December 2019

Orange follows its European rivals with reorganization and tower spin-off

Just a week after Telefónica announced a major reorganization, Orange has unveiled its own changes, under the banner of its latest five-year plan, dubbed Engage 2025.

The French group’s latest plan is far less bold than its Spanish counterpart’s, but includes the creation of a tower operator – an almost de rigeur move for large European operators at the moment, with Vodafone, Telecom Italia, Telefónica and others in the process of divesting cell towers and other infrastructure.

Orange CEO Stephane Richard told shareholders: “The story of this new strategic plan is…a story of sustainable growth.” This growth plan is built around four main activities, plus a cost-cutting program, designed to reduce costs by €1bn by 2023. This is not primarily a staff reduction plan, but a bid to reduce indirect costs through greater sharing with other telcos or partners, higher digitalization and automation, and “the optimization of certain expenses” related to central functions and energy.

Other financial goals of the new plan include EBITDA growth of 2%-3% per year in the 2021-23 period, after a slight expected uptick in 2019 and flat earnings in 2020. Orange is also targeting an increase in organic cashflow to between €3.5bn and €4bn by 2023, from just over €2bn in 2019.

The four pillars of Engage 2025 are:

  • Network expansion and TCO efficiency:

Orange said it aims to “reinvent its operator model” by enhancing its network, investing in 5G, fiber and over-the-top TV to deliver new services, while reducing the cost of these roll-outs with increased sharing or sell-off of assets. RAN sharing will be an important element, as well as shared fiber projects in France, Spain and Poland. And it will save costs by shutting down the French copper network between 2023 and 2030.

Orange will also split off its towers businesses with a view to the possible creation of a pan-European towerco, which could be monetized with the sale of a stake in future, as well as supporting additional tenants on top of Orange’s own base stations. As part of this project, Orange has agreed to sell 1,500 Spanish cell sites to independent European towerco Cellnex for €260m. The scheme mirrors Vodafone’s recently announced project to place its towers in a Europe-wide unit which could later generate cash from the sale of a stake.

  • Three revenue growth areas:

The main sources of growth in the next five years have been named as the Middle East and Africa (MEA) region, business-to-business (B2B) services, and financial services, including the Orange Bank. The telco said it aims to be the “reference digital operator” in the MEA region, while it will “accelerate the transformation of its B2B activities to take advantage of the convergence of telco/IT businesses”.

Both these initiatives build on similar goals set in the last five-year plan, which was called Essentials 2020, though with some new technology enablers taking center stage on the B2B side, including  virtualization, systems integration and edge computing. Orange also aims to generate at least €1bn in revenues from cybersecurity by 2023, and by that date, expects more than 50% of its enterprise revenue to come from new connectivity services, like SD-WAN and 5G, and from IT services.

For financial services, Orange will launch its bank in all its European markets by 2025, after going live in Spain last month, and it will also add banking services to the Orange Money offering it provides in its MEA markets, from 2020. Orange expects the bank to break even in Europe in 2023, and at that point, it aims to generate €400m in net banking income from a customer base of five million; while Orange Bank Africa should reach nearly 10m customers with net banking income of €100m.

  • Improved use of AI and big data analytics:

As part of its broader digital transformation program, Orange will make greater use of AI/ML and other advanced data techniques to enhance and automate the customer experience, while also reducing the cost of supporting customers.

  • Transform the skills profile:

Also to support digital transformation, Orange aims to change the skills profile of much of its workforce by investing €1.5bn in a skills building program.

The plan builds on the previous one, rather than providing dramatic new departures, but it still has a heavy burden on its shoulders, following a run of lackluster results. For the first three quarters of the current fiscal year, Orange reported only 0.4% year-on-year sales growth, to €31.2bn ($34.6bn). Even the enterprise business only increased by 1%, to €5.7bn ($6.3bn).

However, revenues from IT and integration services were up by 7% in the same period, to about €2.1bn ($2.3bn), which explains its heavy focus on harnessing the convergence of IT/cloud with connectivity.

The MEA region delivered revenues of about 4.2% for the first nine months, up 6.3% year-on-year, and Orange is targeting sales growth of 5% over the 2020-23 period. France is its biggest market, but is looking for only modest growth in mobile services revenues in 2020-2023, while its second largest market, Spain, hopes to to return to growth in 2021 after revenues fell by 1.2% for the first nine months of 2019, to €3.9bn ($4.3bn).