France Telecom 1st Half Net Profit +41%, Outlook Confirmed"

PARIS -(Dow Jones)- France Telecom Thursday posted first-half net profit up 41%, as the group stabilized its domestic business while pursuing growth in emerging markets.

Net profit rose to EUR3.31 billion from EUR2.35 billion a year earlier, above an average forecast of EUR2.34 billion from seven analysts polled by Dow Jones Newswires.

The rise in net profit was helped by a EUR671 million drop in income tax from the "recognition of deferred tax assets in France" and a change in the income tax rate in the U.K, France Telecom said in a statement.

The telecommunications giant confirmed its outlook for 2007 of a "near stabilization" of its gross operating margin rate and organic cash flow of EUR6.8 billion, adjusted for the sale of listings unit PagesJaunes Groupe at the end of 2006.

Revenues at France's incumbent operator increased 2% to EUR25.9 billion from EUR25.4 billion a year earlier.

"We don't expect a drop in sales in the second half like we saw last year," Chief Financial Officer Gervais Pellissier said during a conference call with reporters Thursday.

The closely-watched gross operating margin, which analysts consider to be equivalent to earnings before interest, taxes, amortization and depreciation, rose to EUR9.42 billion from EUR9.26 billion.

Pellissier said the group sees "an increased regulatory pressure," in particular the caps on roaming charges imposed by the European Union, the new rules on number portability in France, and changes in the regulatory environment in Poland. Regulatory uncertainty in the company's domestic market has, nonetheless, decreased recently after Arcep, the French regulator, announced on July 24 plans for cuts in mobile call termination rates that were milder than expected.

Call termination rates, the wholesale fees network operators charge other operators to connect calls, are a significant source of revenue.

The question of a fourth French mobile network operator has also become clearer after Iliad emerged as the sole candidate for the available license. Many analysts expect the French authorities will reject Iliad's demand for staggered payments for the license.

"We remain very vigilant on the conditions attributed" to any new operator, Pellissier said in an interview on French radio station BFM.

The entry of a fourth operator is seen as a threat to the margins of France Telecom, Vivendi subsidiary SFR, and Bouygues' telecom unit.

France Telecom's shares have underperformed the DJ STOXX 600 telecommunications index so far this year. A placement of 5% of the company's stock by the French government on June 25 erased many of the gains made previously in 2007.

The company is "a bit disappointed" with its share price performance this year as results "haven't disappointed the market" over recent quarters, Pellissier said in his radio interview.

France Telecom shares closed Wednesday down EUR0.16, or 0.8%, to EUR19.70 in an overall lower market.

Company Web site: http://www.francetelecom.com

-By Jethro Mullen, Dow Jones Newswires; 33 1 4017 1738; jethro.mullen@dowjones.com

(END) Dow Jones Newswires "

Posted to the site on 2nd August 2007