Is Free / Iliad losing it ?

Fr-lgflag It's always very difficult to assess the true health of a company, as that's never a static proposition. In the case of Free it's made even harder by one of the very thing that makes the company atypical: it doesn't rely on outside help much, it has a super-thin corporate structure and it's generally not very talkative. So what's left is financial analysis, which is a blunt instrument, but one that does tell us things that are fairly irrefutable.

Free is often lauded as unique and a model to follow, not just here in France, but especially here. As a consequence scrutiny tends to be closer, and perhaps a little less indulgent than it would be for others. The fact that Free itself seems to act as if nothing can go wrong probably reinforces that perception. 

I have argued a few months ago that Free was changing as a corporation and becoming more like the incumbent it once fought. I base this on feeling and a few public declarations by COO Maxime Lombardini. Last week though, one of the French stock market forums Boursorama, someone posted a financial assessment of their latest numbers which I thought would be interesting to share with you. 

Note that I'm just translating what the guy wrote, not necessarily condoning it, but it's an interesting piece of the puzzle in my opinion. Judge for yourselves:

Now things are a little clearer:

– small 5% revenue growth
– revenue per subscriber doesn't increase anymore…
– huge increase in advertising spending (the Rodolphe trash ad is on all channels all the time to try and step the hemmorhage)
– huge increase in the financial costs for the massive borrowing to finance fiber and GSM (10 000 cells to deploy to allow a launch in 2011 with the 3G interrogations).

Advertising is probably +100 M€… Financial costs for a 1,5 Mds € debt is probably 75 M€ per year (and I'm only calculating based on 5% which is fairly reasonable).

In summary, 175 M€ extra costs not counting the new DSLAM deployments which are less and less profitable because they are in less and less dense areas where Orange or SFR have already deployed…

Add to that the costs in international telephony (which necessarily increases as everything gets free) … say +30 M€ per year…

In other words, the increase in revenue of 100 M€ per year (5%) is largely outweighed by the increase in costs (300 M€)…

At the same time ILD becomes a business that is heavily in debt and will need to support a huge cost to launch its mobile, it's quadruple play and its fiber (which isn't selling if we look at Numéricable's numbers).

So I will renew my analysis: sell, guys, ILD is shifting from growth to risky and losing profitablility with an absence of vision… which the pros will punish massively. 

If I say we'll go below 60 € fast I'll get insulted again, so I'll refrain, we will see…

Again, I don't know who this guy is (and he's posting under an alias) and I'm no financial expert. Still, a lot of what he says gels with things I've heard and/or witnessed. I'm not quite as defeatist as this guy seems to be (but then again I don't own shares either 😉 but the fact that the subscriber losses of the Alice brand are continuing, that advertising is omni-present and that fiber isn't selling are all pretty irrefutable.

Tactically, Free seems to be banking on the launch of its Freebox v6 router and set-top box to stem the tide, but I'm not sure that will address any of the structural issues. I think Free / Iliad is at a turn in its history and needs a radical corporate change to negotiate that turn. Paradoxically, markets probably wouldn't think that a big change in the middle of these heavy investments is the right move, but from a strategy point of view it's quite clear that the success machine is stuttering…