France Telecom is focusing on new superfast mobile services to repair the damage done by a costly price war in its home market, which has eroded its market share and profitability.
Europe's fourth-biggest telecom operator posted a 4 percent drop in first-quarter sales on Wednesday due to mobile price cuts in France, weak corporate demand, and regulatory changes.
Operating cash flow fell 12.9 percent to 1.98 billion euros ($2.58 billion), showing how the operator's home market had become less profitable after the launch of low-cost rival Iliad (Paris, France).
"The price war in France remains ferocious," Chief Financial Officer Gervais Pellissier said on a conference call.
"In the coming months we will be able to test the appetite consumers have for 4G mobile services, and we hope this will allow us to recreate value."
Iliad's Free Mobile service swiftly took 8 percent market share with its no-contract plan at 19.99 euros ($26.02) a month, which comes without a discounted handset. But its founder Xavier Niel spooked rivals when it recently said it was considering offering subsidized mobile phones to win more customers.
France Telecom (Paris, France) said it aims to cover 30 percent of the country with 4G by the end of the year and says only then will the effects be seen. For this year, it forecasts average revenue per user (ARPU) in French mobile will fall 12-13 percent.
Like other major European telecom groups, France Telecom wants to raise ARPU with the arrival of 4G, which allows five times faster downloads on smartphones like Apple's iPhone and Samsung's Galaxy series.
It recently announced 4G tariffs, which will lead customers on contracts costing 30-50 euros a month to pay roughly 10 euros more to upgrade to the new technology, while customers already spending above 50 euros would get it for free.
France Telecom's UK operator, EE (Hatfield, UK), a joint venture with Deutsche Telekom (Bonn, Germany), is pursuing a similar strategy. It reported falling quarterly sales on Tuesday.
The potential 4G payoff is far from certain, and in the meantime France, which represents about 60 percent of the group's cash flow and half of its revenue, remains difficult.
France's second-largest mobile carrier, SFR (Paris, France), cut prices again in January, prompting Bouygues (Paris, France) and France Telecom to react.
Robin Bienenstock, analyst at Bernstein Research, said Iliad's potential move into subsidized handsets would be "another leg down" for France's other operators.
"We think such plan is likely eventually, probably in the form of a tariff at 30 euros, with 4G enabled, and a mid-range smartphone thrown in for free," Bienenstock said in a note.
Revenue in France fell 6.1 percent to 5.07 billion euros in the first quarter, and ARPU fell 10.7 percent.
Group sales stood at 10.28 billion, while earnings before interest, tax, depreciation and amortization (EBITDA) fell 6.6 percent to 3.12 billion with operating margins of 30.4 percent.
Analysts had expected revenue of 10.35 billion euros and EBITDA of 3.12 billion euros, said Thomson Reuters I/B/E/S.
"Costs are better managed than last year, which allowed us to protect margins," he said, adding that the aim was to cut operating costs by 500 million euros this year.
As a result, the group confirmed its 2013 targets of a stable dividend at 0.80 euros per share and operating cash flow above 7 billion, compared with about 8 billion last year.
France Telecom shares rose 2.5 percent to 7.99 euros at 853 GMT. The European telecoms index was up 0.4 percent. ($1 = 0.7683 euros)
(Additional reporting by Cyril Altmeyer; Editing by James Regan and Louise Heavens)