Iliad (Free) releases 2007 annual results

On March 12th, Iliad held a press conference to present their annual 2007 results. Since I know there's a lot of international interest in Free's disruptive model, I thought I'd give you a commented reading, but I also encourage you to look at the complete document they presented.

All the overall market and wholesale figures mentioned here come from the latest ARCEP report on unbundling and the preliminary Q4 figures of their broadband observatory.

Overall Figures

First of all, these are clearly good figures that Iliad is releasing, but on the acquisition side they are not quite as good as last year.

Their subscriber base grew by 650,000 subscribers (27%) in 2007 against an overall market growth of 22%. However, that growth is proportionally smaller than in 2006 for Free (43%) and suggests that Free's competitors have gotten their act together since in 2006 Free was growing significantly higher than the market (34%) in 2006.

In absolute and relative terms, Free's growth is still higher than Neuf Cegetel's organic growth (583,000 subscribers). Free is now however the third player in the market due to Neuf's acquisition of 600,000 customers of Club Internet (T-Online France).

The proportion of unbundled customers (full or partial) continues to increase with a stunning 81.5% of unbundled customers (and 58% of total customer lines fully unbundled). This is again significantly better than the alternative operator market (69% unbundled, 48% of total lines fully unbundled).

ARPU is up to 36.3 EUR from 34.5 in 2006 and 35 at half-year. This is interesting, because it suggests that the second half of the year has been very good for ARPU growth. This is probably the effect of the launch of Free's S-VOD offers (see below). For a reference offer sold at roughly 24.5 EUR ex-VAT, that's a very good ARPU, and nearly 12 EUR of VAS revenue.

Finally Free introduces a metric I hadn't seen in their previous reports (but I could have missed it) which is the % of subscribers using Free as their sole telecom provider. This metric is calculated by adding the fully unbundled customers and those accessing the service through France Telecom's Naked ADSL wholesale offer (available in areas that are not unbundled). That figure is 64%, which is significant both in terms of customer loyalty and for the transformation to ftth in those areas where Free is rolling-out. It's up from 46% in 2006.

Free also announces a churn rate that is significantly lower than 1% per month, but they don't give the exact figure. I don't have a good reference frame for broadband churn rates but compared to other churn rates I know in other areas of the industry, it seems pretty good to me (though it would have been nice to have an actual figure...)

As mentioned above, Free is number 3 on the market but they don't like it one bit. In fact, in their market share graphs they show Neuf's acquisitions as separate from Neuf and still appear to be second when in truth they are third. Orange remains first with 49.4% of the market, but it's important to remember that only 2950 COs (of 13028 ADSL enabled and 13525 total COs) are accessed by alternate operators (and only 1500 by Free). The differential in market share in areas where alternative operators can only get to customers through Bitstream and Naked ADSL is most likely huge.

(Incidentally, I'm currently trying to estimate that differential, but I lack some of the figures. I'll let you know if I get somewhere).

Free intends to roll out to 2200 COs by the end of 2008.

Customers and ARPU

It's always been tricky to identify exactly where the usage of Free customers was since they sell a bundled triple-play offer only, even to customers who are too far from the CO for the IPTV service to work. In fact in their presentation Free contradicts itself (if you don't know better). On slide 7 they say that 100% of subscribers are accessing TV (since they all buy it as part of the bundle) On that same slide and again later they then say that Pay-Tv service is available to 2.3M / 80% of subscribers. Free has never consistently communicated on TV usage, and this is not exactly that, but this could suggest that 80% of Free customers are technically able to get IP TV. Sounds high to me, and will investigate further, but...

More interestingly, they release some figures on six months of TV Perso, namely 168 million broadcasts. Additionally, Free publishes figures on VOD and S-VOD usage. They are a little hard to interpret since they cover VOD features and S-VOD packages Purchased by Quarter, not subscribers. Still, there's an interesting hike between S1 and S2, which can be mostly attributed to S-VOD, I suspect. Basically, from 900k purchases at the end of S1, the figures jumps to 1300k at the end of S2. It's not surprising that the ARPU jumps at the same time and suggests that S-VOD is a promising model!

What about Fiber?

There's not much new in this presentation about FTTH. The only two things that jumped at me are

• "SME Needs" mentioned in the customer needs rationale. This is first time, to my knowledge, that Iliad has mentioned going for the SME market. It's well known that without any specific offer or marketing, Free currently has a non-negligeable share of the SoHo market (around 10%) but I have never heard them express intentions towards the SME market. And yet FTTO is clearly a good opportunity, especially for a player who has no existing revenue to lose from undercutting (unlike Orange or Neuf).
• I did a quick calculation on the rollout targets (4 million homes) and costs (1 billion EUR) and it comes out at 250 EUR/home passed, which is exactly what Free announced for Paris. I very much doubt that they would be able to maintain that cost outside of Paris, so this seems more than a little unrealistic to me...

Free announces that it has signed over 300k homes in turnkey agreements and horizontal roll-outs in Montpellier (where some customers are already active), Valenciennes and the suburbs of Paris.

Some Conclusions

There's more details on the financials in there, which I encourage you to peruse. Overall, these annual results are very good for Free and it's interesting to see that their ARPU increase strategy seems to be working very well indeed. The key issues for the future are how realistic their FTTH deployment plans are, and what happens on the mobile side.

Again, Free states its case for purchasing the fourth 3G licence, but will investors be happy with them following two capital intensive strategies at the same time ? Furthermore, with LTE now announced for 2011, does it make sense to purchase a soon to be obsolete 3G licence? Would it not be more profitable to deploy LTE as a pioneer (thus benefiting from better conditions by vendors who need references) and therefore be better than the 3G competition from a technical standpoint from day one ?