Orange SA

PAR:ORA

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to Orange's Third Quarter 2018 Results Conference Call.For your information, this conference is being recorded.The call will be hosted by Mr. Ramon Fernandez, Deputy CEO, Finance, Performance and Europe, with members of Orange's executive committee for the Q&A session that will start after the presentation.Thank you. And let me hand over to Mr. Ramon Fernandez.

[Ramon Fernandez]

Good morning. Thank you for joining our Q3 2018 Results Conference Call.Let's start with Slide 4, which presents the Q3 and 9 months results.While competition intensity increased this quarter in our key markets, especially France and Spain, our business proved resilient, with total revenues growing 0.6% and non-equipment core revenues growing by 0.8% compared to 1.5% in Q2. Against this backdrop of revenue slowdown in Q3, adjusted EBITDA kept growing at 3%, the same pace as in Q2. Compared to Q2, the slowdown in revenue growth notably involved lower-margin lines of business, such as equipment and IT, and was compensated by lower commercial costs.For the 9 months, group revenues grew by 1.3% year-on-year compared to 1.2% over the full year 2017. The main contributors were Africa, Middle East, France and Spain. In the third quarter, revenue trends improved in Europe, with Poland entering in positive territory.Turning to profitability, 9 months' group adjusted EBITDA grew by 3.2%, which is 1.9% excluding the impact of the ePresse, audiobook offers in France. And this 3.2% is to be compared to 2.1% over the full year 2017, with 75% of our group top line growth translating into adjusted EBITDA growth. Acceleration in telecom adjusted EBITDA was slightly faster with an increase of 3.7% over 9 months, supported notably by France, Spain and Africa, Middle East. These good results were fueled by our investment efforts, fully consistent with our EUR 7.4 billion CapEx 2018 guidance, yet with a different phasing pattern this year, with stronger year-on-year efforts in Q3 and lower year-on-year efforts in Q4.Overall, given our good progress at this point of time, we fully confirm all elements of our guidance for the year.Turning to the next slide, #5. In order to keep our competitive advantage in connectivity, we continued our investment efforts, amounting to EUR 5.1 billion over 9 months or 16.7% of telecom revenues, with a EUR 300 million year-on-year increase in telecom CapEx, mostly linked to France, Europe and Africa, Middle East. Once again, this level of investment is in line with our full year 2018 guidance at EUR 7.4 billion, with the phasing effect giving more relative weight to Q3. In France, the growth in CapEx was mainly the result of: Our ambition to maintain the best networks in the context of the new deal agreements concluding -- concluded at the beginning of the year; accelerating in 4G, we're now covering 98% of the population; and in fiber, with a total of 10.9 million connectable homes, this is a 30% year-on-year increase. Last week, our network superiority was recognized for the eighth consecutive year in the French regulator annual mobile survey, which ranked the Orange network #1 on 181 metrics out of a total of 193.Last but not least, we launched 4G this September in DRC, our 14th country using this technology out of the 20 countries in our Africa, Middle East footprint. Democratic Republic of Congo, by the way, confirmed this quarter its return to growth in both revenues and adjusted EBITDA.Let's now have a look at our commercial performance with 4G and fiber, the key drivers of our solid commercial performance.In fixed broadband, I will list the most notable successes this quarter: First, in France with the launch of our new Sosh 2-play offer, which fills a gap in the Fixed Only broadband segment and has proved a strong acquisition tool; on fiber, in France also, Q3 posted record net adds for a third quarter. Second, the new football offers in Spain enriched our premium broadband plans and strongly contributed to come back to positive net adds for the first time since more than a year. And last, the ongoing success of our fixed LTE and convergent Love offers in Europe.In mobile, bold and simple mobile plans were launched in Belgium in H1 and were the catalyst of our commercial success, with a record level of net adds in Q3. In Africa, Middle East, 4G development accelerated, crossing the 15 million customers milestone end of Q3. This is a plus 57% growth year-on-year.Then the famous convergence slide that we are showing since first quarter of 2017. We remain the #1 convergent operator in Europe with today 10.8 million convergent B2C customers: A 60% penetration rate in France, 85% in Spain, 55% in Poland, where ARPO stabilized, thanks to the launch of Love offers and fiber uptake. As you know, convergence is a strong acquisition and retention tool. It means lower churn and higher ARPO. For instance, but you are used to this, we reached 5 points of churn differential between convergent and total fixed broadband customers in Spain and in Poland.Let's now turn to our business review, starting with France on Slide 9.Total revenues grew in France for the sixth consecutive quarter at plus 0.9% in Q3 despite a very competitive market. Convergence drove our solid performance, with a customer base that grew 4.6% year-on-year. B2C broadband convergent customer high-end mix has improved by 3.4 points year-on-year. We pursued our strategy focused on value, with our 3 ARPOs, Mobile Only, Fixed Only and convergent, growing even excluding the impact of ePresse and audiobooks. Convergent ARPO stood at more than EUR 65, up 4% year-on-year. And both Mobile Only and Broadband Only ARPO grew by EUR 0.30 and EUR 0.50, respectively, year-on-year, once again excluding the impacts of ePresse and audiobooks, thanks to a better mix of our Mobile Only customers and to the FTTH penetration and TV VOD services. This value-driven strategy allowed us to increase our value market share in H1 by 26 basis points, excluding ePresse.Total wholesale revenues decreased by 2.2% in Q3. Mobile wholesale revenue stabilized, thanks to the increase in visitor roaming and MVNO revenues. Fixed and other revenues slightly decreased, mainly due to a decrease in ULL revenues.Turning to the commercial performance. This has been another quarter with intense levels of promotional activities in both fixed and mobile, with some of our peers' offers with discounted prices forever contributing to the increase in churn, notably of our mobile Sosh customers. In this context, we were able to achieve solid performances. On mobile, we recorded 82,000 net adds of mobile contracts, with the high-end mix improving by 2.8 points year-on-year. And on fixed, we recorded 68,000 broadband net adds, thanks to convergence, driven by open offers; thanks to FTTH, with 157,000 net sales this quarter, including 51% from new Orange customers, leading to a total base of 2.4 million costumers; and thanks also to Sosh, contributing with its new 2-play broadband offer, reinforcing our presence in the low end of the fixed market. I would like to emphasize that more than 71% of net adds of this new offer are new customers, so Sosh once again proves to be an efficient acquisition tool.Our strategy remains household centric, with convergent offers tailored to all family members. Our customers are certainly price sensitive, but they also expect more flexibility and more services. In order to better meet these needs, we have revamped our offers with more simplicity, now fixed mobile offers and 2 Internet offers; more generosity, with more data on the mobile and more speed on fiber; and also flexibility on open plans, as now clients subscribing for premium broadband package can choose from a wider range of mobile plans. In line with our value strategy, this change is followed by price increases. It is also part of our multi-service strategy, with the launch of new equipments: An additional WiFi repeater for high-end customers; and a new TV recorder with the best standards on the market to enjoy the best content. By introducing more flexibility, we aim to increase volumes, improve the customer mix and increase our ARPO, in line with our value strategy. In addition, we increased in August prices by EUR 2 in the back and front book of the segment of 2.1 million mobile customers, with no significant increase in churn.Lastly before turning to Spain, some of you may have seen that the French regulator ARCEP has issued a formal warning on what is called universal service. So I'm not going to enter now into details, but let me just say that there are many approximations in what has been said and that we have an action plan in order to address the issues which have been identified.Turning to Spain. In Spain, total revenue grew by 0.5% this quarter. This has been impacted by, first, the MTR cut in February 2018. Excluding this regulatory effect, Q3 total revenue growth would have been 1.4%. It is also the result of an out-of-bundle consumption decrease as a result of service upgrades in the previous quarters. Also, equipment sales dropped in line with our lower subsidy policy. These effects were partially compensated by an increase of international traffic that contributed to a plus 6.4% wholesale revenues increase.In a tough market, we increased our value market share in H1 by 37 basis points, confirming the effectiveness of our strategy focused on value growth, consolidating our performance on the premium segment. In Q3, in Spain, the fixed broadband customer base is back to growth, with 13,000 net adds, supported by 158,000 fiber net adds and the success of our new TV offers enriched with football, allowing us to attract premium customers. TV net adds jumped from minus 3,000 in Q2 to plus 46,000 in Q3, validating the relevance of our content strategy.Mobile remains under pressure in a market becoming more competitive. Contract net adds excluding M2M were negative at minus 18,000 this quarter, while churn rate stabilized sequentially and on a year-on-year basis. This is also the effect of our value-oriented strategy, with the decrease of handset subsidies and the end of our second mobile line promotion. In 4G, we continue to be the leader of the market, with 9.6 million customers. This supports our ambition to reach a high single-digit EBITDA growth over the full year 2018, in line with consensus.Let's now turn to our other European countries, where total revenues grew by 1.6% this quarter, supported by an ongoing positive momentum in retail services, up 2.6% in Q3 versus 1.6% in H1 and minus 1.1% in full year 2017. This positive trend in retail services reflects our ongoing focus on convergence, with revenues from convergence maintaining a strong 53% growth rate this quarter following a plus 59% in H1 and 54% over full year 2017. Our focus on convergence is also visible in our commercial performance, with stronger mobile contract net adds at plus 96,000 this quarter, it was 29,000 last quarter; and also strong fixed broadband net adds at plus 70,000, it was 68,000 in the previous quarter, both outcomes supported by a steady improvement in the share of convergent contracts.From a country perspective, one of this quarter's most notable changes in revenue trends was a return to revenue growth in Poland, up 1.5% this quarter compared to minus 0.8% in H1. Beyond the continuing success of convergence, the key drivers for this turnaround were an improvement in non-convergent mobile services, better equipment sales under the installment model and our energy resale initiative. This represents an encouraging milestone, which supports Orange Poland's turnaround ambition as part of the Orange One strategy announced a year ago.Also worth noting, a stronger growth in Belgium, up 1.9% this quarter compared to 0.9% in H1, driven by a better trend in retail services, with very solid mobile contract net adds, driven by innovative offers, a growing cable customer base and a lower reduction in MVNO revenues.In Africa and Middle East, growth reached 3.7% year-on-year and 5% over the first 9 months of 2018. Excluding Ivory Coast, which went through a slowdown, revenue grew by 5%. This growth was supported by the solid performance of retail at plus 6.7%, still driven by data monetization, with now more than 15 million customers on 4G; and Orange Money growing at 34%. Thanks to abundance offers for voice, negative trend has significantly improved since the beginning of the year. Wholesale revenue kept decreasing, down by 11.7%, particularly on international traffic hubbing this quarter, which is nevertheless a low-margin activity.From a geographical perspective, new operations, including DRC, contributed to 1/3 of the growth, with Burkina Faso and DRC growing, respectively, by 14.6% and 10.7% year-on-year. Egypt posted a double-digit growth at 11%; and other countries such as Morocco, for instance, by 3.5%; or Senegal also showing solid growth. Ivory Coast, on the other hand, saw a decrease in its revenue by 0.7%, notably with -- or because of the backlash of the fire in an important technical site in Q2 and the increased requests related to the customer identification process.Turning to Enterprise. Q3 revenue decreased by 2.2%, but nearly stabilized at minus 0.5% when excluding the significant equipment contract which was signed and billed in Q3 2017. IT and integration services kept its growth trajectory at plus 4% year-on-year, fueled by the double-digit growth trend of CyberDefense at 16% and cloud business at plus 10% in the first 9 months of the year. Mobile underlying trends stabilized, excluding the previously mentioned equipment contract of Q3 2017, and was at minus 11.8% otherwise, while legacy services, voice and data, are still under pressure, with respectively, a decrease by 5.1% and 1.9%.I also recall that, in line with our strategy of diversification into new services, we acquired Business & Decision in June and Basefarm in August to strengthen our positions in the big data and cloud businesses.Last slide is on our short- and mid-term guidance. I can just repeat that with these solid results, we fully confirm our guidance for 2018, which remains unchanged in all its dimensions.I'm now available with my comments -- colleagues to answer your questions. Thank you.

[Operator]

[Operator Instructions] We will now take our first question from Nawar Cristini of JPMorgan.

[Nawar Cristini, Analyst]

So I have 2 questions, please. Firstly, on France, the VAT impacts have been helpful this year to a certain extent, but these positive impacts will be headwinds next year, so I have 2 questions in here. Firstly, would you be able to repeat some of these initiatives in 2019? And secondly, if that is difficult to repeat, the composite growth of 2.5% would mean more than 3% if we adjust for VAT next year. How comfortable are you with that? And if you could talk about the different moving parts, in particular with Spain decelerating. And my second question is on Spain. So we've seen the growth softening this quarter. In particular, retail revenues were slightly in negative territory. So my question is again about 2019. Do you think that Spain can continue to grow next year?

[Ramon Fernandez]

So we're going to -- Laurent Paillassot is with us in Spain. And Fabienne is -- obviously, will answer for France. Laurent, do you want to start, to change a bit the...?

[Laurent Paillassot, Deputy Chief Executive Officer]

Okay, yes, what -- basically what happened in Q3 in Spain is really related to the football content war. As you know, Vodafone sat out of football, so we've had, probably, if you look historically, this is in term of promotions and market churn, quite an historical level we've reached in Q3. So basically, we don't expect this situation to remain. I -- if we look at the situation for Orange Spain, basically in this period, we've been able to maintain the convergent service levels of revenues. So we've done a fair share of growth in term of customer net adds, as you see in the TV figures and the fixed net adds. We estimate we've grabbed roughly 30% of the customer base from Vodafone that was moving in this period of 6 weeks from mid of August to end of September. So really, the situation has been very huge promotions, which we've adopted and it's -- which obviously had an impact on the ARPO this quarter, but we don't expect that to be the situation going forward. As you know, now we are competing more evenly with Telefónica on the high-end level, with Orange having the football and better in front of Vodafone. So we expect the situation to go back to, I will say, a more reasonable level of promotion in the coming quarters. And obviously, we expect to still be able to grow in 2019.

[Ramon Fernandez]

Okay, thank you, Laurent. And so for France, and Fabienne maybe complement, but we are not, as you know, issuing precise indications for 2019 EBITDA growth in different countries. Otherwise, I think it's going to be really, I mean, an impossible journey for all of you. So what you have seen is very strong performance in France over 2018, and with very strong assets, premium contracts performing very well. And we are managing quite well. And Fabienne can come back on it, on what has been supporting this performance, both in value and in volumes, with once again, a value market share of Orange France increasing compared to our competitors. So this is just a fantastic achievement. And as I said in my initial comments, this is also supported by our prices, ARPOs, which are growing even when you take away the VAT impact. So even when you neutralize the add-on coming from VAT, you have positive growth in France, both in total revenues and in terms of Mobile Only, Fixed Only and convergence ARPO. So I'm not willing to comment more on what is the perspective for EBITDA in France, in Spain, in OBS, in [ OMR ], in Poland, in Belgium, et cetera, in 2019. But the dynamics we have is very solid and is not at all, of course, depending on only the VAT add-on.

[Operator]

Our next question will come from Stephane Beyazian from Raymond James.

[Stephane Beyazian, European Telecoms Analyst]

Two questions, if I may. The first one is regarding, again, the comments from ARCEP. I was just wondering whether do you think you need to spend more to match with the ARCEP's demands on the network service delivery. And whether you can, you think, react quite quickly or whether, again, that will require some investment and will take a little bit of time? And my second question is regarding the content strategy. Stéphane Richard made some comments in a French parliamentary session about possible content partnership with Altice. Also, he mentioned some explanatory options with Deutsche Telekom, as well the launch of obviously, of RNZ Sport. Are you able to say a little more on what sort of projects you could come up with in your content strategy?

[Ramon Fernandez]

Well, on the ARCEP story, and if some -- so first, Fabienne is going to take this one, but for my part, what I can say is that, of course, we are taking with a lot of care the ARCEP call to -- for action, despite all the approximations that have been circling around. And this is, of course, fully embarked in our different plans in OpEx and CapEx. What we need to do is to be more focused in some areas in the pain points, but this is embarked within our global CapEx plans. Maybe Fabienne, more details on this?

[Fabienne Dulac, Deputy Chief Executive Officer]

Yes, just maybe this is the reality, and we know and we are not happy about that, but we have some problem on the copper network. This has been we have a deterioration of the copper this year especially, and this is notably due to several extreme climactic event we had in France from September 2017 in [ Irma ] which was 6 storm different in France this -- last year. So we know this problem. And we embedded it from a few months, so I can say that we have already fully embedded in our OpEx and CapEx budget the necessary efforts we need to do for the ARCEP, for the government, but for the customers, first of all. We have an action plan, and that is we will present it to ARCEP and to the government during next week. This effort will lead to a slight increase in our maintenance costs in 2019, comparing this year 2018, but this is embedded. And it's correlated with the decreasing of the number of copper line, so there's no problem.

[Ramon Fernandez]

On content, there is still and always a lot going on. Just to recall our basic strategy, which is to be essentially distributing and aggregating content, but also in some cases, participating directly to production in cinema, series and also in sports, to some extent, in different countries. But this is a case-by-case story. Maybe Laurent can come back on Spain, where football has been a key part of our performance on the broadband sector. You could look at different geographies in Europe, for instance in Slovakia, where we have the Champions League rights. And in France, as you know, it's a different story, where we are partnering with different players. So with Altice, there has been discussion ongoing for quite a while on sports or cinema. This discussion is still ongoing, and we will close it when we think the time is good to close it. For the time being, we are not there yet, no urgency, no urgency at all. With Deutsche Telekom, we are discussing regularly on many issues. We are partners in BuyIn. You know that we are working with them in order to launch our personal assistant, Djingo for us, Magenta for them, in the next months. And we can also consider exploring joining forces in some other areas, why not in content? So it's part of the issues that we discuss with our German friends, but all in all, the strategy is the same, essentially distribution, aggregation, being very attentive to the costs. We will be spending, as you know, more in 2018 than in 2017, but with a lesser increase. We had increased by EUR 200 million our costs in content in 2017. It will be around plus 100-something in 2018. And this is helping us to secure this great performance, these -- that we are showing in our both volumes and value. We will continue on this road, with Canal+, with beIN SPORTS, with HBO, with OCS, with Sony Pictures, with all our partners which are helping us to secure these good performances.

[Operator]

We'll move to our next question from Andrew Lee of Goldman Sachs.

[Andrew J. Lee, Equity Analyst]

I had 2 questions. The first one, on French competition and consolidation. I mean, if we look at the rise in churn on a quarter-on-quarter and year-on-year basis this quarter, Q3 looks like the most intensely competitive and turbulent quarter in France we have had for a while, which is saying something. I'm wondering if you can just talk to what the run rate you see so far in Q4 through October. And do we still have to wait until January to restart convergence talks, or can they start earlier? And then the second question is just on EBITDA growth, following up from the third -- first questions from Nawar, and the tax headwinds you have, but obviously, you have cost-cutting flexibility as well. I wonder if you can talk about the scope to take out costs in 2019 relative to 2018, do you expect to accelerate the cost cutting and how should we think about that?

[Ramon Fernandez]

Well, maybe a few words, and Fabienne will also comment. On the first question and perspective of consolidation in the context of heightened competition, I would say it's more or less the same story. Competition is tough in the French market. We know it. It has been probably even tougher in the last quarter, but despite this, despite this, we are able to secure what you have seen, with a slight increase in churn, but if you compare it to 1 year ago, it's very close. So it's not really significant. And it's going with both these volume impacts and ARPO increases that we have seen. So with this performance, the pressure is more on those who are seeing negative cash flows and who are facing massive hurdles in terms of managing their own networks or being convergent players on the market which is more and more convergent. So basically, I guess everybody is aware and the 4 players are aware or convinced that consolidation will happen at some point, and that it is a necessity in order to face the next steps, including 5G. And now it only takes the time for one of the players to just jump in the water and swim. And this can be done through different means, different scenarios. We're not going to elaborate on all the possible options. There is no impossibility for people to work and reflect on these options. And then when somebody is ready to jump, the other guys are ready to go also in the water and swim together to find the best possible scheme. So let's see. Our guess is that it will happen. Now it's then everybody can have its own conjecture. In terms of EBITDA, once again, EBITDA has been growing on a very regular basis in France for quite a while, right? And this is ongoing. And this is not going to stop whatever, VAT, tax or whatever other impacts. There is a very strong engine. Fabienne will come back on this, what is the strength of our convergent machine in France. And we are not going to slow down our cost-cutting or cost-efficiency efforts, especially if this competition environment remains tough. Once again, we'll see what happens with consolidation, but we have announced that we would have a follow-up to the cost efficiency program, Explore 2020, in 2019 and 2020. We are working on OpEx. We are working on CapEx. And we are working on all these areas, and this will be supporting the ongoing performance of the French operations in the future. So I think I'm quite comfortable with this, in fact. Fabienne?

[Fabienne Dulac, Deputy Chief Executive Officer]

Yes, just to complete, and to be in the same way as Ramon, for the first question, I want to recall that, since Free Mobile has been launched in 2012, every player suffered high churn. And the issue to 2018 is more than ever a turbulent year with a very tough market. The -- this year, we appeared on the market, the provision of a life plan on mobile at a very low price. We are convinced that it's not sustainable over time, so -- because that, it obviously deteriorates the revenues. Then they affect the growth and will impact at the end the investment we needed to do. So we believe that this French market is not sustainable in this way and is not sustainable with 4 players. When will be the consolidation? It's complicated to answer this question, but I think everybody needs to -- to have discussion all the time. Because for the Q4, we sadly expect the same trends and the same kind of market with the profusion of promotion and a profusion of plan at a very low price. In this context, for Orange, the strategy is still the same. We maintain our strategy, premium strategy, to preserve the value. On the broadband, we expect to continue the growth at a steady pace, thinks -- thanks to the convergence and the fiber. And we will maintain our strategy to be tactical when we need to be, as we are with the launch, La Boîte Sosh, and as we were with Sosh mobile. And in this context, we are sustainable, maybe more than our competitors. For the second question, we have a plan and a plan -- an important plan of reduction in costs. And we'll keep the intensity of transformation to generate a sustainable efficiency in the same trend in 2019 and 2018. The digitalization is a very important and a significant point of our transformation, and it will be the same next year.

[Operator]

We'll now take our next question from Daniel Morris of Barclays.

[Daniel Morris, Research Analyst]

Another quick follow-up on France, please. You mentioned earlier that you're seeing more than, I think, 70% of Sosh acquisitions coming externally. I just wondered, as you look through September and into October, we've obviously seen EUR 5 per-month promotions and then followed by EUR 10 per-month promotions in October. Are you seeing any shifts in that external acquisition percentage? In other words, is there more spin down in the last month or 2? Or are you managing to maintain the premium differentiation despite the heightened competition in the last 6 weeks, effectively?

[Fabienne Dulac, Deputy Chief Executive Officer]

No, there is no change in the mix, and Sosh is still a weapon to be on the low-end market. And as I explained a few minutes ago, this low-end market on the broadband is more and more significant in France this year. So it's why we launched La Boîte Sosh, to use Sosh as a weapon. But there is no change in the mix. It's important for us to launch La Boîte Sosh, because it's -- this is a weapon to address new customers, students, smart shopper, digital native, and we saw at the beginning of the year, these kind of customers were not in our customer base. So there's no impact on the mix between premium and low end on France of Orange. Sosh is still a weapon to acquire customers, new customers and different customers.

[Operator]

We'll now take our next question from Nicolas Cote-Colisson of HSBC.

[Nicolas Cote-Colisson]

Two quick questions, please. First, in the press release, you mentioned lower commercial expenses at the group level. Can you explain this in the context of intense competition in France and Spain? And my second question is on France. ARCEP has called, a year ago, for more wholesale competition in the B2B market. We start seeing some offers out there, from KOSC in particular. What are your expectations on that side of the business, please?

[Ramon Fernandez]

On -- maybe on the B2B segment, let's start with Helmut Reisinger, Head of OBS.

[Helmut Reisinger, Chief Executive Officer of Business Services]

Thank you very much, Nicolas, for the question. On B2B in France, you're right. Competition is intensifying. We maintain our course in terms of being a premium service player, and this has paid off in the past, also on the French market to maintain our positioning. And with the customers going more and more into IT and integration services...[Audio Gap]

[Operator]

Ladies and gentlemen, please stand by, as we are experiencing a momentary interruption in today's conference. Thank you for your patience. Please continue to hold.[Technical Difficulty]

[Operator]

[Operator Instructions] Our next question comes from Julio Arciniegas of RBC.

[Julio Arciniegas, Analyst]

Two questions, please. In Spain, broadband net adds are back to positive. How much of this is driven by the start of the football league? And how sustainable is this recovery? Or just to put it in another way: Will football continue driving broadband net adds in the next quarter? Or this is just a result of the start of the season in Q3? And my second question is also regarding broadband net adds. I have seen that basically, this quarter, they have been driven by non-convergent services, which actually is opposite to what has happened in the previous years. Is there a change of strategy in Spain to drive broadband growth?

[Ramon Fernandez]

So we'll go -- thanks for the questions. We'll go to Laurent in Spain to answer. Just before, and sorry for the cut, I understand that you didn't get my answer on the previous second question on commercial costs, et cetera. So what I have been saying that probably I have been speaking only to my colleagues here in the room, I was saying that, yes, we have been successful in reducing direct costs on a number of lines. And in terms of commercial costs, the probably good illustration I can give you is that in Q3, and sorry if I was already heard on this, we reduced the net equipment costs by EUR 47 million, thanks to lower subsidies and the adjustments in our commercial policies, both in France and in Spain. So you can see that this is also a contribution to the EBITDA performance, and it has been also successful in terms of sustaining the commercial performance. Now let's turn to Madrid for the 2 broadband Spanish questions. Laurent?

[Laurent Paillassot, Deputy Chief Executive Officer]

Yes, on net adds, obviously, the football content back-to-school has been helping to get the strong dynamics. Again, in the context of very high promotions, ourself, we limited promotion to really what we need. We could have done a lot more volume, but at prices which made no sense. I can remind you that Vodafone was offering 50% forever against Movistar customers; 50% for 12 months was the basic promotion in the market. So we really limited ourself during this period. Very good results in FTTH also. We've had some 158,000 customers in fiber. If we look to the coming quarter, basically, the football is not stopping end of September. The Champions have started in October. And we are now in a period where we're doing good volumes, at least for Orange Spain, in a context where all the promotions are, at least for Movistar, because it is the one that's been triggering the promotion war in Q3, is not doing any promotions. So we are doing net adds, and we are doing it a lot cheaper than in September, because the context in term of promotions is more favorable. So -- and we expect the football to be able to drive us for more volumes until the end of the year, because basically, not all of the Vodafone customers which are looking for football, have moved in the first 6 weeks. We expect, we think that they've probably lost 1/3 of that customer, football customer base, so there is a way to go for us to grow, and we expect to capture these good news in the next quarter.

[Julio Arciniegas, Analyst]

Yes, and my questions regarding non-convergent broadband net adds, which actually it hasn't been the situation in the last, I don't know, like 8 quarters. Is there anything particularly happening in the strategy, why basically this time, non-convergent broadband net adds have been driving growth?

[Laurent Paillassot, Deputy Chief Executive Officer]

I think the main explanation might be the students. As you know, there is a seasonality effect which is impacting Q3, mainly due to student offers, but otherwise, there is no major change and switch in terms of strategy.

[Operator]

Following technical difficulties, we will now return to the questions from Nicolas Cote-Colisson.

[Nicolas Cote-Colisson]

I think the question has been answered. Just one thing, can you just repeat the amount of savings on the equipment costs? Did you say EUR 30 million for the quarter?

[Ramon Fernandez]

I said EUR 47 million.

[Nicolas Cote-Colisson]

EUR 47 million, okay.

[Operator]

We'll now take our next question from Frederic Boulan of Bank of America.

[Frederic Emile Alfred Boulan, Senior Analyst]

Quick question on the French market and segmentation in this market, with your more cheaper and more aggressive fiber promotions on the low end of the market. Are you still confident with the overall position on ARPU lift on fiber versus UDSL -- DSL? Don't you think people might choose to go for Broadband Only and get some of the additional products? And then secondly, if you can come back on your ambition to grow the fixed wholesale business, with the peak in 2020. We're starting to see some pretty sharp declines in that line of business. You had pretty strong growth in mobile, but the overall wholesale business in France shrunk 2.2% in the quarter. So can you comment a little bit on the EBIT dynamic here in the next quarters or years?

[Ramon Fernandez]

Okay, Fabienne on the first question, and then we'll go to Jerome Barré, who's heading the new wholesale unit in Orange.

[Fabienne Dulac, Deputy Chief Executive Officer]

Yes, the market from the beginning of the year, as I explained, is more and more aggressive, with the low-end market more and more dynamic. According to our internal estimates, the low-price segment represents about 50% of the market, especially in Q3. We are, and it's important to note that, we are the least exposed to this low-end market on the mobile and on the broadband. That represents a very small part of our customer base and of our acquisition. We use Sosh as a weapon, as I said, to be in a turbulent market and to acquire some customers focused on price, but that doesn't change our strategy. And there's no cannibalization in the low -- in the high-end market. 100% of our mobile net add are on high end in Q3. And it's 80% of the broadband high-end net add are made on high end. So this is the proof. And you can see that in the ARPU, in the revenues. We're addressing different, new segments with Sosh 2P, but that doesn't change the strategy we have to preserve the value, to preserve Orange. And more and more, we are convinced that customers is ready to pay for more services. And it's why we made a move in October to enrich with services, with more speed, with more offers and with more flexibility, generosity, as explained by Ramon at the beginning of the meeting, our offers in Orange. The strategy we've had is still the same: Resist, and defend the value creation.

[Ramon Fernandez]

And so on the fiber uplift, comparing the ARPU of fiber against the DSL, we confirm that we have this uplift, around EUR 6, and we are comfortable that we can sustain this. Once again, I said this already, but in terms of pricing power, it's good to see that in this very competitive environment, we were able, as Fabienne just recalled, to revamp all the catalog offers that I also described initially. And the fact we were able, in late August, as we had done 1 year before, to have a EUR 2 price increase on one mobile contract for more than 2 million customers, including on the back book, with no uplift in churn, is also, I think, a good testimony of our capacity to put a price to our contracts, even if, of course, this market is extremely challenging. So it's a very positive signal. And then Jerome will take your second question.

[Jerome Barré, Director]

Okay, yes, you're right. So our revenues in wholesale in France decreased by 2.2% in the Q3 on the year-to-year basis. In fact, first thing, it's, this result is fully consistent, in line with our forecast. It's a result due to the -- to opposite evolutions. The [ unbundling ] revenues are decreasing, but on the other hand, fiber and the PIN network revenues are increasing. What we expect is that, in the future, the revenues from fiber and the revenues from PIN will speed up, and so it will completely upset -- offset, sorry, the decrease of copper revenues. And for example, for the Q4, we expect a year-on-year positive result, because there has been -- revenues will be significantly higher than in Q3. And on the whole, we maintain the, you were mentioning our commitment for 2022 revenues in wholesale, and so we maintain our commitment to have a fixed, even growing, revenues for wholesale fixed activities in France.

[Operator]

We'll now take our next question from Nick Delfas of Redburn.

[Nick Delfas, Research Analyst]

It's just returning to the theme of consolidation. I understand that, at least in the mobile market, Iliad would be still relatively small in a consolidation scenario potentially, but I'm a bit confused about how competition would continue on the fixed plan side. The -- I think that Bouygues is a key maverick in the market right now. Could you just talk a little bit about how you think regulators would ensure sustainable competition in a consolidation scenario? Because otherwise, it's a little bit hard to see how this could be allowed through.

[Ramon Fernandez]

Well, you have more countries in the EU with 3 players than 4 players. So if in order to have competition, it was an absolute prerequisite to have 4 players, I don't understand what happens in a vast majority of European countries, not talking of China, which is going probably to go from 3 to 2 players. So I mean, the assumption that going from 4 players to 3 players in France would be a major issue for a competition authority, for regulators, because as such, it would imply less competition, is for me, just doesn't make sense. Consolidation makes sense not because as such, it leads to higher prices, it's just because this is a fixed-cost industry. And if you are 3 players, you can amortize your costs better than if you are 4 players; 3 networks instead of 4, et cetera, et cetera. So from what we heard from competition authorities, and I think, our French regulator, which from time to time, says strange things, but on this one, I think a few months ago, we read that depending on the conditions, et cetera, that he had no obstacle in principle to consolidation in the French market. And so then you need to look at the specificities. You can have many scenarios. Those people who speculate about these issues from time to time think that maybe SFR or Iliad could do something together. And then in this scenario, you still have Bouygues, if you want to have a maverick, as you say, which could play its role. And Iliad would not be so small anymore. So really, it's speculating about things we don't know, but the important point for me is that I don't think there is anybody, I don't think there is anybody in France, who believes that consolidation would raise impossible questions in terms of the competition environment. So now it is, in fact, to the telecom players. It is for the 4 players to decide what they want to do and to go to the authorities with a scenario. And then the authorities will examine these scenarios and take a stance. But the stance, in principle, is that there is no opposition for such a scenario. Now it is for the operators to come out with a plan. That's it. So once again, the issue is not on the side of the competition authority.

[Operator]

Our next question will come from Nicolas Didio of Berenberg.

[Nicolas Didio, Analyst]

I have 2 questions, if I may. The first is regarding some comments you made this morning to the press regarding no follow-up on the roaming agreement with Iliad. I was looking at the audition at the Senate from Stéphane Richard saying that Orange is open to continue working with Iliad and there might be further episodes in terms of network sharing. So I just wondered are we talking about the same, like, 2 months ago or 1 month ago, there was open mind, and you changed your mind, and you're not longer willing to extend work with Iliad? That's the first question. The second question is, can you give us an update on the commercial dynamic of Orange Bank? I don't think we have a number since February on this. And the last question is on -- coming back on the VAT benefits. Do you have a kind of pre-agreement with the government that you are in the right position in reading the law or you might have a risk of a claim back on the amounts you received?

[Ramon Fernandez]

So on your first question, I think you need to read back your notes from Stéphane Richard's audition in Parliament. He never said that he was looking for an extension of this roaming agreement with Iliad. Once again, as I said this morning to the press agencies, there is an agreement, there is an end to this contract, which is end 2020. And this is a contract. At some point, everybody has to live with its own expectations, hopes, ambitions. And at some point, you need to have your own network and to support your own traffic. This is how it works. So we have a contract, it will end. Fabienne wants to add something?

[Fabienne Dulac, Deputy Chief Executive Officer]

Yes, just maybe to complete, because Orange has a strong premium network on the mobile, and I want to recall that ARCEP recognized it for the 8 years consecutive. So this is a significant value for us and for the customer. And I'm not sure we have the necessity to enter into a sharing network agreement, because quarter-over-quarter, year-after-year, we have a better and a premium network. This is a significant asset for Orange, and we want to maintain it for our customer.

[Ramon Fernandez]

So you see, this is the answer. Before turning to Orange Bank, and Paul de Leusse will take this, because I can take the third one, which is extremely quick. On the VAT stuff, there is no -- I mean, nothing to worry about. We have applied the law without any form of over, I don't know what, that maybe some other players at some point in history have done. So we are absolutely [ confident ] on this. There is no issue there. Paul?

[Paul de Leusse, Deputy CEO for Mobile Financial Services]

Yes. Thank you, Ramon. On Orange Bank, well, the commercial performance is good. It's even increasing on a monthly basis, as communicated by end of September, that we were now opening between 15 and 20 new clients per month. October seems even better and promising, as we should exceed 20,000 new clients for October. What is good also is that all channels are performing well. I mean, the digital channel is increasing on a monthly basis. And the physical channel, i.e., Orange shops, is also increasing, with a very interesting thing, which is that the number of sales made by Orange salesperson in Orange shop is also increasing, which means that the commercial productivity of Orange staff is just increasing on a monthly basis. So all of that makes us comfortable that we are reaching our target. We will issue a much more comprehensive view of Orange strategy regarding financial services, not only in France, but overall in France, in Europe and in Africa, and this view should be made by the end of this year in London to press and analyst conference that we will organize.

[Nicolas Didio, Analyst]

Can I just have a follow-up on the network? Does it mean as well your comments that you rule out any network sharing agreement with Iliad?

[Jerome Barré, Director]

So it's Jerome Barré. I'm in charge of the wholesale activities of the group. As Ramon said, we have a contract, a roaming -- a national roaming contract, which is ending in 2020. That's it. And we have absolutely no discussion with Iliad about the new agreement on a one sharing base. So no -- absolutely no discussion.

[Operator]

We will now take the next question from Giovanni Montalti of UBS.

[Giovanni Montalti]

You were mentioning declining revenues from the cofinancing areas. As far as I understood, if I understood correctly, you are -- you were saying that in Q4, we may see new growth from this revenue line. Can you give us a bit more comment in terms of who's doing what? How do you see your competitors investing in these areas? And also, on Spain, I mean, the market seems to be getting tougher. What is the biggest risk, in your view, of further destabilization of the market, of this trend continuing, as we've seen in Q3?

[Jerome Barré, Director]

Back to your question concerning cofinancing in Q3. First, you have to take into account that there is seasonal effects. The traditional cofinancing revenues in Q3 are low. It was higher in the first half of the year. We expect them to be higher in Q4. So at the moment, we do not expect any significant move, and we maintained the trend of the level of cofinancing for fiber in France.

[Ramon Fernandez]

[Foreign Language], Jerome. And then depend on different players have different strategies, but we are not going to enter into details on what SFR, Iliad and Bouygues do, but the trend is one that Jerome said. Maybe we can go to Madrid for Spain?

[Giovanni Montalti]

Sorry, if I may follow up, I'm not entirely sure I got the answer. So do you see, let's say -- I understand you don't want to comment about each of the different players, but do you see a consistent trend of growth in cofinancing from your competitors? Do you see that the share that they are cofinancing growing? I guess, you have some visibility also on the plan of investments of your competitors. Do you see this growing? Or maybe the competition that we're seeing in the market is pushing back further investments for your competitors?

[Jerome Barré, Director]

So again, no, it's fully in line with our forecast. So as Ramon said, we won't say who does what. Some of our competitors buy more than expected, some of them buy less. And when you put everything together, it's just in line with our forecast. We don't know yet what the intention would be in 2019, but for 2018, it's absolutely aligned with our forecast. And so no significant change. Again, there's a question of seasonal effect in Q3, but we expect better news in Q4. So no significant change.

[Ramon Fernandez]

And maybe, Jerome, I think just a quick point. You have cofinancing. You have location line-by-line. And so depending on the OpEx, CapEx choices of different players, it can vary over time quarter-on-quarter. So you have to look at all the lines in order to identify what is exactly the level of resources that different players mobilize.

[Jerome Barré, Director]

Yes, when you consider the kind of cofinancing, in fact, you have 2 things. You have a decreased minoration of CapEx plus revenues. The OpEx are coming in revenues. Some of them prefer consuming -- spending OpEx, and so we have to consider the total amount of CapEx plus OpEx, which again, is fully aligned with our forecast.

[Ramon Fernandez]

So looking at the cash flow constraints of different players, you can draw your own conclusions. Now let's go to Madrid.

[Laurent Paillassot, Deputy Chief Executive Officer]

Again on Q3, I think we have to recognize the situation was exceptional. Remember that basically Movistar was the first one to trigger the promotion war. It's offering the football and offering 50%, 12 months and triggering reaction from Vodafone. If you look, they had to justify the overall cost of football. Keep in mind, they are bearing 80% of the cost of football is on Telefónica. MÁSMÓVIL has been quite reasonable. We've been quite reasonable at this moment. Now promotions for Movistar have stopped. I think they've proven their case, that they can grab customers from Vodafone. So we expect the market to go back to a reasonable level of promotions. And if we look at Vodafone, basically, they cannot wait, everything they're trying to save on football, on new promotions. So I do believe that they should become rational. But if you ask me what is the risk on the Spanish market, it might be coming from the Vodafone competing on the local segment. O2 is not an issue for the moment because they are not pushing into Movistar. So I guess, it's all reasonable and can be Vodafone in cutting promotions. But otherwise, all the players have an interest in maintaining a reasonable market and a reasonable competition. So we'll see.

[Operator]

We will now take our next question from Jerry Dellis of Jefferies.

[Jeremy A. Dellis, MD & Senior Telecommunications Analyst]

I have 2 questions, please. Firstly, on Spain. Your competitors assert that the wholesale contract with MÁSMÓVIL allows you to recalibrate pricing on a 12 monthly basis. I wondered if you could confirm, please, whether that is actually the situation on that contract. And then secondly, in terms of group level sort of leverage policy, you're still committed to leverage of around 2x over the medium term. On consensus numbers, you will be, I think, at about 1.9x by the end of this year, with leverage declining at about 0.1 turns a year. So just be interested in your thoughts about the appropriate level of group leverage going forward and potential implications for dividend policy, or alternatively, keeping your powder dry, exactly where the priorities might lie?

[Ramon Fernandez]

Okay, maybe Laurent, first?

[Laurent Paillassot, Deputy Chief Executive Officer]

Yes, obviously, there is an NDA with MÁSMÓVIL on the contract, but what you described is not correct, that's for sure.

[Ramon Fernandez]

And so on the second question, we are in markets where having a solid balance sheet with a leverage around 2, which is our case, is a very strong asset. One never knows where financial markets can go. I would say that the current global environment is fragile. So having this strong balance sheet for Orange is an asset. And so we will stick to this policy, which is sound. Now going forward, depending on the ongoing performance that we foresee, we will see what conclusions can be drawn on other issues such as the dividend policy. But what you have seen in the past 2 years is that when we are on track with our objectives, and this has been the case and is still the case, we have been in a position to augment the dividend. We've gone from EUR 0.60 to EUR 0.65. You know that we propose to go to EUR 0.70, and this will be proposed to our shareholders in 2019 for the year 2018. And so we will continue on this track. It's good to have a solid balance sheet. And if performance makes it possible, we never forget our shareholders.

[Operator]

Our next question will come from Alexandre Iatrides of ODDO.

[Alexandre Iatrides, Analyst]

I would like to focus on the segmentation in the French market. You've been increasing prices for 2.1 million customers. When we look at the offer, now you offer 2 hours of voice and 5 gigabytes for EUR 16.99, when for the -- during this third quarter, you had offers at EUR 5 forever for 20 GB and unlimited voice. I'd like to understand what kind of service and what kind of -- how do you allow to have this kind of gap? And what makes you confident on the fact that you can still increase prices? It's the second time that you increased prices also for the back book. Should we expect maybe other increases if this segmentation is -- trend is confirmed? And also, should we think promotions as being part of the M&A saga? Or is it part of the segmentation process, because taking this 2 hours and 5 gigabytes bundle, you now apply higher promotion than in the past, so is promotion plus increasing capital price a trend? Or is the high level of promotion part of M&A saga?

[Ramon Fernandez]

Fabienne?

[Fabienne Dulac, Deputy Chief Executive Officer]

Yes, you're right, the French market has 2 segmentations, low-end market, high-end market. To make the difference, Orange pursued the same strategy focused on quality, quality of the network, fiber, quality of the mobile network, and I recall what disclosed asset few days ago. And we have 2 bedrock: Network and quality of the customer experience. Just maybe, for example, in the last move we launched in October to sustain our focus in value-creation, we enhanced the Livebox up with more services, WiFi extender, video recorder, and we increased the FTTH speed. So we have -- we are able to prove the differentiation by services, by quality of network. And our aim is, through this move, to improve the mix, boost the gross add and prove that there is a different price and different kind of services delivered in France. And it's exactly what we succeed to do, because if you observe the result and the outcome, as I explained, we -- quarter after quarter, the mix of premium in the customer base, on mobile, on broadband, on convergence, is still increasing. So we will maintain even if it's difficult, even if the -- despite a very aggressive market on mobile and especially on ADSL this year, we will maintain this strategy. And all the outcome prove we can do that. Because customer is ready to pay a little bit more or more if you give more.

[Ramon Fernandez]

Thank you, Fabienne. And maybe I would chime also my answer to your question of is it segmentation, is it the M&A saga? My guess would be that this kind of ultra promotional mood is part of the M&A saga. But at the same time, I think that certain players may be under some form of unsustainable pressure as far as cash flow generation is concerned. So at some point, it should reach an end. And when exactly this will be the case, we don't know. We had previously this talk about consolidation, but it's not sustainable.

[Fabienne Dulac, Deputy Chief Executive Officer]

Maybe at one point, I forget, when you asked if we are able to have another back book price increase, I think we will do it if we can. I remember, and I recall you, we did it last year on Open Mini. We did it in October. As explained by Ramon a few minutes ago, 2 million mobile customers, we increased the price in the front book for one, for opener plan. So each time we can, as we have the best network in France, we will increase the price if it's possible, yes.

[Operator]

We will now take our next question from Emmet Kelly of Morgan Stanley.

[Emmet Bryan Kelly, Head of European Telecoms Research]

I just have one question, please, which relates to spectrum auctions. So we just had a spectrum auction in Italy, as you know, which saw 3 of the 4 operators there pay pretty significant fees for spectrum. I guess, this was largely due to the structure of the auction were just too big, 5G licenses on offer at 3.5 GHz. Can you maybe just say a few words about spectrum auctions in France? I believe there's an auction taking place right now for spectrum renewals, so maybe a few words on that. And I know it's very, very early, and your thoughts will be very preliminary, but maybe just a few thoughts on the 5G auction that ARCEP is targeting for next year, please?

[Ramon Fernandez]

So it's a bit early to answer, as you've said, to this question. What -- but what we can say is that governments have a choice. They can decide either to maximize short-term revenues, and this is what Italy has done, by the way they structured their 5G auction. And so they maximized short-term revenues. But at the same time, it is absolutely evident that the billions paid for spectrum will not be available to invest on the network. So governments have to choose between very short term and medium to long term. What we have seen in France in early 2018 is that the government, which is very committed to accelerate connectivity and digital progress in the country, has decided to do exactly the contrary. And so the government entered into this discussion with, and at the initiative of our regulator, so let's give back also to ARCEP what is legitimate. ARCEP proposed and the government accepted to have this new deal approach, by which the 4 telecom players committed to accelerate investment, covering low-dense areas with 4G, and in exchange, the government accepted to extend for 10 years, our licenses, with no extra auction. And this was, on the government's side, renouncing to potentially around EUR 3 billion. This is for us, Orange, we estimate savings in cash of around EUR 800 million. And on the other side, we committed to invest more in these less dense areas. So the French government, up to now, has made the exact opposite choice of the Italian government, and we entered a 2-way, win-win agreement, by which we will have better connectivity in France, with everybody playing its part, okay? So it will be the same government and the same regulator preparing for the 2019 5G spectrum allocation auction, and we will see what the government will decide to do. But there is little reason to expect that there would be a fundamental change in this way of reasoning. This is, I know, quite general, but since technically, we don't know the answer, I think it's important to be aware of the general approach to this and what happened in Italy, I think, is a perfect counter example of what should be done in Europe if we want to go to 5G and not lag behind what is going to happen in America or in China.

[Operator]

We will now take our final question from Alexandre Roncier of Exane.

[Alexandre Charles-Edouard Roncier]

Just one, if I may. Following up on Spain wholesale, I believe MÁSMÓVIL recently moved its rural roaming from Telefónica to you guys. Maybe you could give us a little bit more color on how much it's driving your wholesale revenue increase there and how we should think about the run rate forward for overall wholesale in Spain?

[Laurent Paillassot, Deputy Chief Executive Officer]

The movement from Telefónica to our network has happened last year, so you had that in the last year results, and it was a favorable growth basically in last year. So this year, we are more on a stable basis, for the roaming agreement with MÁSMÓVIL.

[Ramon Fernandez]

Okay, thank you. So I guess it's 1 minute past 10, so except if somebody has a burning, burning question, I think it's...

[Patrice Lambert De Diesbach, Senior VP & Head of Investor Relations]

We are here.

[Ramon Fernandez]

And Patrice is sitting next to me and says we are here. So the team is available on an ongoing basis to answer to any question. We will be on the road starting tomorrow. Thank you for participating to this call. Thanks to all my colleagues here and [Foreign Language].

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.