May 3, 2012 / 6:30 AM / 5 years ago

UPDATE 2-France Telecom limits pain from new mobile operator

* Loses 615,000 mobile clients in Q1 in France

* Roaming contract with Free Mobile limits revenue hit

* Q1 revenue down 1.8 pct, operating margin declines

* Confirms 2012 cash flow guidance, to miss 2013-15 goals

* Shares up 2.6 percent (Recasts, adds analyst, shares)

By Leila Abboud and Gwénaëlle Barzic

PARIS, May 3 (Reuters) - France Telecom said a revamped offering had helped limit the damage caused by the launch of a low-cost mobile competitor in January, boosting investor hopes it can cope with the tumult building in its key home market.

The former state-owned monopoly said on Thursday it lost a net 615,000 clients - about 2 percent of its total in France- in the first quarter after the launch of Iliad 's Free Mobile.

France Telecom confirmed guidance for operating free cash flow of 8 billion euros ($10.5 billion) this year, but chief financial officer Gervais Pellissier said the group would not hit goals for 2013-15 laid out in a strategic plan last year.

First-quarter revenue - down 1.8 percent to 10.92 billion euros, compared with a forecast for 10.81 billion - was helped by a deal to carry Free Mobile's traffic while the new player builds its network.

The operating margin slipped 1.7 points to 31.4 percent.

Free Mobile has put France on a path from being one of Europe's more profitable markets to one of the toughest. Margins have been forecast to fall to the mid-20s percent - akin to the competitive British market - from the mid-to-high 30s.

France Telecom, Vivendi's SFR and Bouygues Telecom are having to spend heavily to retain customers, and two of the three have scaled back dividend pledges.

France Telecom itself has cut prices, pushed its low-cost brand Sosh, and offered all-inclusive bundles of mobile, fixed, TV and internet.

"Our commercial reaction has paid off," Pellissier said on a conference call, adding requests for customers to switch to another operator had returned to normal levels by April having peaked in March.

France Telecom shares rose nearly 4 percent in morning trading before giving back some gains to rise 2.3 percent to 10.47 euros at 0942 GMT.

Guy Peddy, a telecom analyst at Macquarie Securities, said while the results gave him hope the company could weather the storm in France, much remained to be done.

"It is a bit like they have built a new foundation and we still need to see what the new house will look like," he said.

France Telecom's first-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) reached 3.43 billion, compared with a Thomson Reuters I/B/E/S consensus of 3.45 billion.

France Telecom's roaming contract to carry Free Mobile traffic was initially expected to bring in 1 billion euros over six years, but will actually bring in that sum in just three years, the company said.

Free Mobile has signed up 1.5-2.2 million clients, according to competitors' unofficial tallies.

France Telecom shares are down 16 percent this year, underperforming a 6 percent decline in a European telecoms index . ($1 = 0.7603 euro) (Editing by Dan Lalor)

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