Orange(ORAN) - 2023 Q4 - Annual Report

PART I Item 3 Key information Orange outlines its primary operational, legal, financial, non-financial, and U.S. listing-related risks, including geopolitical instability, cyber-attacks, and asset impairments Risk Factors Orange categorizes its principal risks, encompassing operational challenges from global presence and cyber threats, legal issues in regulated markets, financial concerns like asset impairment, and non-financial risks including data privacy and environmental commitments - Orange's extensive geographic operations expose it to significant geopolitical, macroeconomic, and security risks[31][32][33] - The company faces a high risk of service interruption, particularly from cyber-attacks, with potential significant financial and reputational impacts[51][52] - Competition from Over-The-Top (OTT) service providers and other global non-telecom actors poses a major risk, potentially marginalizing traditional operators[40][43] - The Group is exposed to significant litigation risk, particularly with competition authorities, with potential fines up to 10% of consolidated revenues[76][77] - As of December 31, 2023, gross goodwill from acquisitions totaled €33.9 billion, with potential for material impairment adversely affecting earnings[80] - The company's commitment to Net Zero Carbon by 2040 faces risks due to its environmental footprint being predominantly linked to its value chain and increasing digital traffic[109][110] - Holders of American Depositary Shares (ADSs) face disadvantages compared to direct shareholders, including lack of double voting rights and longer voting processes[130] Item 4 Information on Orange Orange provides an overview of its business, history, and structure, highlighting business seasonality with lower fixed-line traffic in Q3 and higher mobile sales in H2 - Fixed-line telephone traffic is generally lower in the third quarter due to seasonal variations[143] - New mobile customer acquisition and equipment sales are typically higher in the second half of the calendar year, driven by the Christmas season[144] Item 5 Operating and financial review and prospects This section analyzes Orange's 2023 financial performance, noting a 6.6% comparable increase in operating income to €4,969 million, a rise in net financial debt to €27.0 billion, and an 8.5% comparable decrease in capital expenditures Operating Results In 2023, Orange's operating income reached €4,969 million, increasing 6.6% on a comparable basis, primarily due to the non-recurrence of a 2022 goodwill impairment, partially offset by higher external purchases, restructuring costs, and depreciation Operating Income (2023 vs. 2022) | Metric | 2023 (in millions of euros) | 2022 (in millions of euros) | Change (Historical) | Change (Comparable) | | :--- | :--- | :--- | :--- | :--- | | Operating Income | 4,969 | 4,801 | +3.5% | +6.6% | - The comparable basis increase of €308 million in operating income was mainly due to the counter-effect of the €817 million goodwill impairment recognized in Romania in 2022[157] - Positive changes were partially offset by a €555 million increase in external purchases, a €332 million increase in restructuring costs, and a €305 million increase in depreciation and amortization[157] Liquidity and Capital Resources Orange's net financial debt increased to €27,002 million at year-end 2023, while capital expenditures decreased 8.5% on a comparable basis to €8,062 million due to reduced network roll-out spending Net Financial Debt Reconciliation (Telecom Activities) | (in millions of euros) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Non-current and current financial liabilities | 35,993 | 36,638 | | Net derivatives (assets)/liabilities | (678) | (1,069) | | Cash and cash equivalents | (5,504) | (5,846) | | Investments at fair value | (2,678) | (4,500) | | Other adjustments | (131) | 72 | | Net financial debt | 27,002 | 25,298 | - Investments in property, plant, and equipment and intangible assets totaled €8,062 million in 2023, an 8.5% decrease on a comparable basis, reflecting lower investment in very high-speed broadband fixed networks[163] Summary of Contractual Commitments (as of Dec 31, 2023) | (in millions of euros) | Total Payments Due | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Financial Liabilities | 58,976 | 20,505 | 7,694 | 6,923 | 23,854 | | Total Other Liabilities | 24,046 | 9,314 | 4,424 | 2,735 | 7,573 | | Unrecognized Contractual Commitments | 8,777 | 3,412 | 2,138 | 976 | 2,252 | | TOTAL | 91,799 | 33,231 | 14,256 | 10,633 | 33,679 | Item 6 Directors, Senior Management and Employees This section details Orange's governance, including board composition and compensation, and workforce statistics, showing a total of 137,094 employees at year-end 2023 with a shift from France to international subsidiaries Employees At year-end 2023, Orange Group's active workforce was 137,094, with a 2.3% decline in French permanent contracts offset by a 1.5% increase internationally, alongside a 14.7% decrease in French subcontracting Group Employee Headcount (Active Employees) | Year | Total Group Employees | Permanent Contracts | Fixed-term Contracts | | :--- | :--- | :--- | :--- | | 2023 | 137,094 | 134,654 | 2,440 | | 2022 (Comparable) | 138,008 | 135,418 | 2,590 | | 2021 (Historical) | 139,698 | 136,928 | 2,771 | - The number of permanent employees in France decreased by 2.3% (-1,675 employees), while the international permanent workforce grew by 1.5% (+914 employees) on a comparable basis[185][186][188] - The use of subcontracting in France decreased by 14.7% in 2023, representing 24,809 full-time equivalent employees, mainly due to the end of widespread fiber network roll-outs[202][203] - Social dialogue is organized through international forums including the European Works Council, the Worldwide Works Council, and the Orange-UNI Global Union Alliance, supplemented by global agreements on social rights, health & safety, and gender equality[205][206][213] Item 7 Major shareholders and related party transactions This section details Orange's ownership structure, noting that U.S. corporate and institutional investors held approximately 18.35% of its share capital as of December 31, 2023, and outlines arm's-length transactions with subsidiaries - As of December 31, 2023, U.S. corporate and institutional investors held approximately 18.35% of Orange's share capital[222] - As of March 15, 2024, 53,279,105 American Depositary Receipts (ADRs) of Orange were outstanding[221] - Orange SA engages in arm's-length agreements with its subsidiaries for services including support, brand licensing, and cash management[224] Item 9 The offer and listing Orange's ordinary shares trade on Euronext Paris (ORA) as part of the CAC 40 Index, while its American Depositary Shares (ADSs) are listed on the New York Stock Exchange (ORAN) - Orange's Share is traded on Euronext Paris (ticker: ORA) and is included in the CAC 40 Index[230][233] - The company's American Depositary Shares (ADSs) are listed on the New York Stock Exchange (ticker: ORAN)[230][233] Item 10 Additional information This section covers French foreign investment control, French and U.S. tax implications for shareholders including a 0.3% French financial transaction tax, and disclosure of limited, non-material telecommunications activities in Iran Memorandum of Association and Bylaws This subsection details the French foreign investment control regime, requiring prior authorization from the French Ministry of Economy for non-EU/EEA investors crossing a 10% voting rights threshold in Orange, with non-compliance leading to severe penalties - Under the French foreign investment regime, non-EU or non-EEA investors crossing a 10% voting rights threshold in Orange must obtain prior authorization from the French Ministry of Economy[242] - Failure to obtain prior authorization can render the investment null and void and may result in significant fines, up to double the investment amount or 10% of the target's annual turnover[244] Taxation This part summarizes French and U.S. tax consequences for non-French residents, noting a 0.3% French financial transaction tax on purchases, a general 25% French dividend withholding tax (reducible to 15% for eligible U.S. residents), and potential foreign tax credits for U.S. Holders - Purchases of Orange's shares or ADSs are subject to a 0.3% French tax on financial transactions[268] - Under French domestic law, dividends paid to non-residents are generally subject to a 25% withholding tax, reducible to 15% for eligible U.S. residents under tax treaties[269][273] - For U.S. Holders, dividends from Orange are includable as foreign source income, potentially taxed at preferential rates, with a foreign tax credit available for French taxes withheld[288][290] Disclosure Pursuant to Section 13(r) of the Exchange Act Orange discloses limited telecommunications activities in Iran, generating approximately €4 million in gross revenue and €0.36 million in net profit in 2023, representing much less than 1% of consolidated revenue - Orange conducts limited telecommunications business in Iran, including roaming and interconnection agreements[309] - In 2023, these activities in Iran generated gross revenues of approximately €4 million and a net profit of approximately €0.36 million, representing much less than 1% of the Group's consolidated revenue[309] Item 12 Description of securities other than equity securities This section details the fee structure for Orange's American Depositary Shares (ADSs), managed by Bank of New York Mellon, and notes the Depositary reimbursed Orange $2.8 million in 2023 for ADR facility maintenance and investor relations programs Fees Payable by ADS Holders | Depositary Action | Fee | | :--- | :--- | | Issuance of ADSs | $5.00 (or less) per 100 ADSs | | Cancellation of ADSs | $5.00 (or less) per 100 ADSs | | Cash distribution | $0.05 (or less) per ADS | | Depositary service | $0.05 (or less) per ADS per annum | - In 2023, the Depositary made payments of $2.8 million to Orange to reimburse expenses related to the ADR facility and investor relations programs[323] PART II Item 15 Controls and procedures This section affirms the effectiveness of Orange's disclosure controls and internal control over financial reporting as of December 31, 2023, with an unqualified opinion from independent auditors KPMG and Deloitte - Orange's Chief Executive Officer and Chief Financial Officer concluded that the Group's disclosure controls and procedures were effective as of December 31, 2023[330] - Management concluded that the Group's internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[336] - The independent registered public accounting firms, KPMG S.A. and Deloitte & Associés, issued an unqualified opinion on the effectiveness of the Group's internal control over financial reporting as of December 31, 2023[337] Item 16G Corporate governance Orange outlines how its corporate governance, following French law and the Afep-Medef Report, differs from NYSE standards, particularly regarding board independence criteria, the advisory role of committees, and committee composition - Orange's Board of Directors determines independence based on the French Afep-Medef Report, potentially resulting in a majority not considered independent under NYSE criteria[355] - Under French law, board committees are advisory only, with the Board of Directors serving as the sole decision-making body[355] - The Audit Committee includes two non-independent directors who fall within SEC Rule 10A-3 exemptions for foreign government representatives and non-executive employees[355] Item 16K Cybersecurity Orange details its cybersecurity risk management through a Group Security Management System (GSMS) overseen by the Corporate Security Directorate (DSEC) and the Board, reporting no material incidents since early 2023 - Orange has implemented a Group Security Management System (GSMS), guided by international standards, to manage cybersecurity risks, with the Corporate Security Directorate (DSEC) responsible for its implementation and analysis[361][362] - The Board of Directors has overall responsibility for cybersecurity risk oversight, exercised through the Audit Committee, which receives regular reports and risk analyses from the DSEC[370] - As of the filing date, Orange is not aware of any cybersecurity incidents since the beginning of 2023 that have materially affected or are reasonably likely to materially affect the company[365] PART III Financial Statements Orange's 2023 consolidated financial statements show revenue growth to €44.1 billion, net income increasing to €2.9 billion, total assets stable at €110.1 billion, and cash from operations at €12.1 billion, impacted by the VOO acquisition and strategic shifts Consolidated Income Statement Highlights | (in millions of euros) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | 44,122 | 43,471 | 42,522 | | Operating income | 4,969 | 4,801 | 2,521 | | Consolidated net income | 2,892 | 2,617 | 778 | | Net income attributable to owners | 2,440 | 2,146 | 233 | | Basic earnings per share (in euros) | 0.85 | 0.73 | 0.00 | Consolidated Statement of Financial Position Highlights | (in millions of euros) | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Total assets | 110,052 | 109,650 | 108,071 | | Goodwill | 23,775 | 23,113 | 24,192 | | Total equity | 35,098 | 34,956 | 35,361 | | Non-current financial liabilities | 30,535 | 31,930 | 31,922 | Consolidated Statement of Cash Flows Highlights | (in millions of euros) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 12,054 | 11,235 | 11,236 | | Net cash used in investing activities | (7,008) | (10,448) | (5,976) | | Net cash used in financing activities | (5,465) | (3,343) | (4,834) | | Change in cash and cash equivalents | (419) | (2,556) | 427 | Note 3: Gains and losses on disposal and main changes in scope of consolidation In 2023, the most significant change in consolidation scope was the acquisition of 75% of VOO in Belgium for €1,369 million, resulting in €684 million of goodwill, alongside ongoing strategic transactions like the MásMóvil joint venture and Orange Bank withdrawal - On June 2, 2023, Orange Belgium acquired 75% of VOO for €1,369 million, resulting in €684 million in goodwill[504][510] - The planned combination of Orange's activities with MásMóvil in Spain into a 50-50 joint venture is awaiting European Commission approval, expected by February 22, 2024[512][514] - Orange has entered exclusive negotiations with BNP Paribas for a referral partnership for its Orange Bank customer portfolio in France and to take over its business in Spain, as part of its retail banking market withdrawal[519] - In 2022, the merger of Deezer with a SPAC resulted in Orange recognizing a gain on disposal of €77 million, as its stake was reduced and it no longer exercises significant influence[520][524] Note 6: Employee benefits Total labor expenses recognized in operating income were €9,018 million in 2023, with a €241 million additional provision for French part-time for seniors (TPS) plans due to pension reform, and Long-Term Incentive Plans (LTIP) tied to organic cash flow, CSR, and TSR Labor Expenses Breakdown | (in millions of euros) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Wages and employee benefit expenses | (8,863) | (8,754) | (9,587) | | Employee profit sharing | (134) | (149) | (145) | | Share-based compensation | (21) | (16) | (185) | | Total in operating income | (9,018) | (8,920) | (9,917) | - The French pension reform enacted in April 2023 resulted in an additional provision of €241 million for the French part-time for seniors (TPS) plans[658] - The 2023-2025 Long-Term Incentive Plan (LTIP) for senior management ties share awards to performance conditions based on organic cash flow (40%), Total Shareholder Return (30%), and CSR targets (30%)[683] Note 7: Impairment losses and goodwill Orange recognized no goodwill impairment in 2023, contrasting with €789 million in 2022 and €3,702 million in 2021, with the net book value of goodwill at €23,775 million at year-end 2023, and France and Spain CGUs showing high sensitivity to discount and growth rate changes Goodwill Impairment History | (in millions of euros) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Romania | — | (789) | — | | Mobile Financial Services | — | (28) | — | | Spain | — | — | (3,702) | | Total | — | (817) | (3,702) | Net Book Value of Goodwill by Segment (Dec 31, 2023) | Segment (in millions of euros) | Net Book Value | | :--- | :--- | | France | 13,176 | | Europe | 5,291 | | Africa & Middle East | 1,403 | | Orange Business | 2,263 | | Totem | 1,624 | | Total Goodwill | 23,775 | - A sensitivity analysis shows that for the France CGU, a 134 basis point increase in the discount rate would equalize recoverable and carrying value, while for the Spain CGU, a 67 basis point increase would have the same effect, indicating higher sensitivity[729] Note 13: Financial assets, liabilities and financial results (telecom activities) This note details Orange's telecom financial position, with net financial debt at €27,002 million at year-end 2023, a 91% fixed-rate gross financial debt, and €500 million in bond issuances against €1,488 million in repayments in 2023 Net Financial Debt (Telecom Activities) | (in millions of euros) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Gross financial debt after derivatives | 35,205 | 35,684 | | Assets included in calculation | (8,203) | (10,386) | | Net financial debt | 27,002 | 25,298 | - In 2023, the Group issued a €500 million bond and made repayments on various bonds totaling €1,488 million[926] - The fixed-rate component of gross financial debt was estimated at 91% at December 31, 2023[965] Note 17: Mobile Financial Services activities This note details Orange Bank's financial activities, with total financial assets of €3.5 billion and liabilities of €3.2 billion at year-end 2023, a cost of risk of €56 million, and a strong liquidity position (LCR of 784%) amid its retail market withdrawal Orange Bank Financial Position (Dec 31, 2023) | (in millions of euros) | Amount | | :--- | :--- | | Total financial assets | 3,471 | | o/w Loans and receivables to customers | 2,394 | | Total financial liabilities | 3,173 | | o/w Payables to customers | 2,601 | - The cost of risk for Orange Bank amounted to €56 million in 2023, mainly concentrated in France and Spain, with Spanish risk related to mobile handset financing[1159][1160] - Orange Bank's liquidity position is strong, with a Liquidity Coverage Ratio (LCR) of 784% at year-end 2023, supported by diversified financing including the RAISIN term account program which grew to €1.2 billion[1164][1165] Note 18: Litigation Orange is involved in significant legal disputes, with provisions for litigation risks totaling €283 million at year-end 2023, including ongoing cases with Digicel, damages claims in France, and a shareholder dispute concerning Korek Telecom where a joint venture involving Orange was awarded $1.7 billion - Provisions for litigation risks (excluding tax and social security) amounted to €283 million at December 31, 2023, a decrease from €387 million at the end of 2022[1193] - In the long-running dispute with Digicel, the Paris Court of Appeal ordered Orange to pay €249 million in 2020, with the French Supreme Court partially quashing this ruling in March 2023 and referring the case back to the Court of Appeal[1195] - Orange faces several damages claims in France from competitors like Bouygues Telecom and Iliad concerning the quality of service of its wholesale offers on the copper local loop, with claims totaling over €170 million[1196] - An arbitration court awarded a joint venture between Agility and Orange $1.7 billion in damages in a dispute with its Iraqi co-shareholder in Korek Telecom, and Orange has initiated separate arbitration against the Republic of Iraq for unlawful expropriation[1202]