Orange confirms 2015 targets despite weak first-quarter profit

By Gwénaëlle Barzic and Eric Auchard

PARIS/FRANKFURT (Reuters) - France's largest telecom company, Orange SA (ORAN.PA), posted slightly lower than expected first quarter core profits after growth in mobile and Internet subscribers and cost cuts failed to offset price declines and higher spending on networks.

Orange said sales came in at 9.67 billion euros (6.91 billion pounds), down 0.9 percent but above a company-compiled average analyst estimate of 9.63 billion. Restated core profit, however, fell 1.9 percent to 2.92 billion falling just shy of the average poll estimate.

"The pace of (operating expense) reduction was not impressive" in the first quarter, Banco Espirito Santo de Investimento said in a note to clients. Some of the recovery in revenue was offset by higher commercial expenses, it said.

Nonetheless, the company stood by its previously stated full-year 2015 financial targets for restated core profit of 11.9 billion to 12.1 billion euros, which is down slightly from the 12.19 billion euros it reported in 2014.

Its shares fell 4.4 percent in Paris trading, the worst performer in the 22-component STOXX 600 European telecoms index (.SXKP). So far this year, Orange stock has risen 5.5 percent, less than a third of the 18 percent gain in the telecoms index.

Roughly half of Orange revenue comes from French operations, with rest split, more or less, among the rest Europe, and emerging markets in Africa and the Middle East, plus an international services business serving multinational companies.

In its home market, Orange doubled the number of new mobile customer contracts in the first quarter but has had to contend with more intense price competition from rivals Free (ILD.PA) and Bouygues (BOUY.PA), which have introduced low-cost packages combining high-speed fixed and mobile broadband services.

To shore up results, Orange relies on cost cutting, mainly of labour expenses in France. But it faces added costs as it rapidly expands its network of mobile transmitters across Africa and the Middle East, where revenue grew 6.9 percent.

Improvements in core profits are expected to be slower in the first half of this year, in part due to higher regulatory costs, but are seen recovering in the second half to help Orange meet its targets, Chief Financial Officer Ramon Fernandez said.

"We are extremely confident that we will achieve ... all our commercial objectives this year," Fernandez said.

First-quarter capital spending rose 3.0 percent on a comparable basis to 1.19 billion euros, while the core profit margin dropped 0.3 percentage points from a year ago to 30.1 percent.

The company said it expected European Union competition regulators to approve by the end of May its 3.4 billion euro acquisition of Jazztel (JAZ.MC), Spain's No. 2 fixed-line broadband supplier, allowing it to close the deal this summer.

Orange said its Mobistar unit was prepared to play a role in consolidation of the Belgian market following the proposed acquisition of operator Base by rival Telenet (TNET.BR).

(Editing by James Regan and David Clarke)