UPDATE 1-France's Iliad profit drops 26 pct on build-out costs

Tue Mar 19, 2013 3:18am EDT

* Free Mobile service took 8 pct share last year

* Mobile business fuels growth in fixed, broadband

* 2012 EBITDA 921.4 mln v. consensus 827.77 mln

* Aim to grow fixed revenue by more than 5 pct in 2013 (Adds details)

PARIS, March 19 (Reuters) - France's low-cost telecom operator Iliad posted a 26 percent earnings drop because of the ongoing cost of building its new mobile network that still beat analysts' forecasts.

Since its launch in January 2012, Iliad's Free Mobile service has taken an 8 percent market share and forced larger competitors France Telecom, Vivendi's SFR, and Bouygues Telecom to cut price to compete. Iliad is also the second-biggest broadband provider behind France Telecom.

"We are in a period of transition to becoming an integrated fixed and mobile operator," said Thomas Reynaud, chief financial officer.

"Although our profits fell we are still in the black, with a solid financial structure that allows us to invest heavily in our networks."

Earnings before interest, tax, depreciation, and amortisation (EBITDA) rose 10.6 percent to 921.4 million euros as the mobile service drew additional customers to the traditional broadband and fixed business.

Net profit fell to 186.5 million euros, and the dividend was stable at 0.37 euros per share.

Analysts expected EBITDA of 827.77 million and net income of 164.12 million euros, according to Thomson Reuters I/B/E/S.

Iliad, which markets its services under the brand name Free in France, also said it would aim for revenue growth from fixed services of more than 5 percent this year.

Iliad's fixed business has flourished since it launched mobile service because more customers are buying discounted all-included bundles. Its free cash flow from fixed telephone and broadband jumped nearly 66 percent to 508.8 million last year.

Earlier Iliad posted an increase of nearly 50 percent in full-year sales to 3.15 billion euros, and said it had gained 5.2 million customers last year.

Amid a price war, France's average revenue per mobile user (ARPU) fell 10 percent to 336 euros last year, according to its telecom regulator, with a further 10 percent drop predicted by France Telecom this year.

Iliad also sparked fierce political debate on jobs and a competition regulator inquiry on whether the group was relying too much on a roaming contract with France Telecom to carry its mobile traffic while it builds its network.

Last week, the regulator said Iliad should end the roaming deal by 2018 at the latest and called for closer scrutiny of its buildout. Iliad is required by law to cover 75 percent of the French population with its own mobile network by 2015, and 90 percent of it by 2018.

It said in January the coverage was 50 percent with some 2,300 mobile antennas erected compared to the 10,000 it typically takes to cover France.

On Tuesday, it pledged to hit its 2015 obligation of 75 percent coverage a year earlier than planned, by end-2014.

"We need roaming to begin our mobile business but we are investing massively to build our own network at the same time," said Reynaud.

Iliad shares rose 36 percent last year, and are up 15 percent this year to 149.70 euros. In contrast, the European telecom index fell 10.7 percent last year, and is up 7.4 percent this year. (Reporting by Leila Abboud and Catherine Monin; Editing by Christian Plumb)

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