* Q3 sales, profit slip amid intense competition in France
* Full-yr cash flow target up to "slightly more" than 9bln euros
* Worsening economy may have small impact on enterprise business
* French mobile deterioriating ahead of Iliad launch (Adds analyst, details)
By Leila Abboud
PARIS, Oct 27 (Reuters) – France Telecom nudged up its annual cash flow target for the year, saying tight cost controls and the predictability of client subscriptions would allow it to withstand any deterioration of Europe’s economy.
Europe’s fourth-largest telecom operator in terms of market capitalisation also posted largely in-line third-quarter results but weak performance in its all-important French mobile business signalled how competition in France is intensifying ahead of the entry of French broadband specialist Iliad .
France Telecom and its other competitors — Vivendi’s SFR and Bouygues Telecom — have been cutting prices and spending more on marketing to try to lock in customers ahead of Iliad’s mobile launch, expected early next year.
The moves have caused margins at all three operators to slip in recent quarters, and analysts expect the trend to continue.
"At first glance, the results are good with Spain and Poland improving and broadband share strong," said a London-based analyst. "But the French mobile market is getting worse and markets may be underestimating the challenges ahead there."
Analysts estimated that French mobile revenues actually slipped 3.5 percent in this quarter; France Telecom doesn’t disclose this specific number.
Chief Financial Officer Gervais Pellissier explained the weakness in French mobile by the fact that Apple’s iPhone had launched last year in the third quarter, boosting sales a year ago, whereas this year the effect of the new iPhone 4s would be in the fourth quarter.
Pellissier said the group was confident it could keep costs down in the final quarter despite the new iPhone launch two weeks ago, which could lead to higher marketing costs.
"For the iPhone 4S, we aren’t the most aggressive in terms of the subsidies in France, yet that hasn’t stopped us from reaching good recruitment levels," he said.
France Telecom saw its third quarter revenue on a comparable basis slip 2.1 percent to 11.28 billion euros.
Restated earnings before interest, taxes, depreciation and amortisation (EBITDA) on a comparable basis fell 5.2 percent to 3.998 billion euro.
The company now expects its restated operating cash flow for this year to be "slightly more" than 9 billion euro instead of its prior target of 9 billion euro.
Pellissier said renewed economic concerns could have a "small effect" next year on its enterprise business, which sells telecom gear and services to corporations.
But he argued that France Telecom would be somewhat protected even if a new recession were to take hold in its key markets of France, the U.K., Poland and Spain, since clients were mostly locked into long-term contracts.
"In a tough economic climate, people tend to cut their spending on traditional voice services, but new services like mobile data are still growing strong," he said.
As for the group’s ongoing portfolio review underway since summer, Pellissier said France Telecom was expanding it to include its operations in Africa and the Middle East, as well as its enterprise unit.
But he downplayed the idea that the review would lead to major acquisitions or disposals in Africa or the Middle East, and excluded the outright sale of the enterprise division.
"With the recent deals in Congo, Iraq and Morocco, we have already practically reached our goal of doubling revenue from emerging markets by 2015," he said. "Our dedication to Africa is still important based on an idea of creating regional clusters."
France Telecom has already begun trying to sell its Switzerland and Austrian operations, deals which could bring in some 2 billion euro, according to analysts.
France Telecom shares were up 0.7 percent at 10:23 GMT as the French blue chip index was up 4.3 percent.
France Telecom’s shares are off 16 percent this year, while the sector’s top performer Vodafone is up almost 6 percent, and Telefonica is down 10 percent. The Stoxx Europe telecoms index is down 6 percent. ($1 = 0.724 Euros) (Additional reporting by Marie Mawad; Editing by James Regan, Christian Plumb and Jane Merriman)
