Dominic White discusses Vodafone’s financial results and reckons more encouraging signs lay ahead
Vodafone UK was again the European star of the mobile giant’s latest results announcement.
Britain was the only major European country where Vodafone increased profits, revenue or operating cash-flow.
It’s quite a turnaround from a couple of years back when Vodafone was having a wretched time in its native land.
The UK operations more than doubled its operating profit to 348 million in the 12 months to March 31, and generated almost a billion for the company’s coffers.
Vodafone UK’s profit and cash contribution remains a fraction of that of Vodafone Germany and Spain, a reflection in part of the fiercely competitive nature of the UK mobile market. But the UK’s financial figures are traveling in the right direction.
The UK business also increased service revenue – which excludes handset sales – by an impressive 4.7 per cent over the full year.
The company put it down to “increasing penetration of smartphones and mobile internet bundles, and strong net contract-customer additions, which more than offset continued competitive pressures and weaker prepaid revenue”.
Margins increased, too, by 0.7 per cent, reflecting the higher service revenue, but partially offset by higher customer acquisition and retention costs. But it seems the regulator may spoil the party this year, with Vodafone warning that “the termination-rate cuts announced in March 2011 are expected to have a significant impact on revenue growth during the 2012 financial year”.
That wasn’t enough to dampen the spirits of Vodafone investors, however. Having seen the shares bounce back from just above a pound last year to 172.45p at the time of writing, they seem pretty pleased with the group’s overall results.
Network quality
Vodafone also gave the market a pleasant surprise with a bullish outlook for 2012.
Analysts had been poised for a cautious outlook. Vodafone shares had eased six per cent since April 20, the day before Dutch rival KPM cut its forecast and warned about the state of the mobile market.
But Vodafone chief executive Vittorio Colao said the UK-based group was holding its own or adding share in most of its big markets.
He told reporters the group was benefiting from its early push into data revenues generated from mobile internet access, and the development of integrated and tiered pricing plans.
And he reckoned that customers are increasingly basing their choice of operator on the quality of the network, putting Vodafone in a strong position.
“Continuing network investment is an important differentiator for Vodafone, improving the customer experience and giving us leadership in smartphone penetration and in customer take-up of data plans,” he said.
“We enter the new financial year well-positioned.” Shares rose on Tuesday, the day of the announcement, which showed revenues and adjusted operating profits both up over three per cent.
The free cash-flow number also pleased investors, coming in at more than 7 billion, compared with a forecast of 6.7 billion.
Analysts say Vodafone is leading the shift to smartphones in many markets. “Vodafone’s historic performance as a serial underperformer versus peers appears to be a thing of the past,” said Bernstein analyst Robin Bienenstock.
But the results were nevertheless dented by the economic slump in southern Europe, which contributed heavily to a 6.1 billion writedown to the value of the company’s assets in Greece, Spain, Portugal, Italy and Ireland.
That means in all those countries Vodafone now expects to make less money in future years than it had previously expected to, an accounting calculation that automatically triggers a write-down.
O2’s owner Telefonica also reported difficult trading in Spain, while Deutsche Telekom showed weakness in Greece.
Elsewhere, Vodafone performed strongly in key emerging markets India and South Africa. India reported growth of 16.2 percent and Vodacom, which operates mostly in South Africa, the Democratic Republic of Congo and Tanzania, grew 5.8 per cent.
Under pressure from shareholders, Colao has overseen a series of corporate retreats from the old Vodafone empire.
He has also put a stop to Vodafone’s old expansionist habits, which were most evident under his predecessors Arun Sarin and Sir Christopher Gent, which often ended in tears and even bigger write-downs.
This week he signalled that Vodafone could go back on the acquisition trail, indicating that it would consider consolidating existing European markets.
Asked if Vodafone would buy rivals in European markets, Colao replied: “Consolidation would be a good thing. There are situations where I can see consolidation being beneficial to all.”
He said Vodafone was prepared to be an “active” participant in consolidation in Europe. I wonder if Three UK could be on his potential target list?
O2 also strong
Meanwhile, O2 UK has put in a decent performance of its own, sustaining its market-leading churn figures and growing the customer base by five per cent.
According to the latest results of its Spanish parent Telefnica, the company’s mobile customer base (excluding Tesco Mobile) reached 22.3 million at the end of March (up four per cent), underpinned by strong contract growth (up nine per cent).
But most impressive was the underlying margins, which rose two percentage points to 27.3 per cent in the fourth quarter.
That was helped by higher hardware revenues, as more punters shelled out for fancy smartphones and others chose to sign up for fixed-line services.
As a result, revenues rose by a solid-looking 5.3 per cent to 1,788 million while underlying profits grew by 13.7 per cent to 430 million in the quarter.
But whereas Vodafone continued to increase its capital expenditure in the UK over the last financial year (from 494 million to 516 million), O2 is scaling back its investment.
Its capital expenditure declined 3.2 per cent to 144 million in the quarter and it said it would be “continuing to improve its mobile network from a coverage and capacity perspective mainly through the re-farming of 900MHz spectrum”.
If Colao is right, and punters are increasingly choosing operators based on the quality of its network, it will be fascinating to see how the different players invest in the coming years, as 4G comes on stream.
