Vodafone returns to profits as CEO Colao steps down

Alongside a solid set of annual results, Vodafone revealed that chief executive Vittorio Colao will step down in October after ten years in charge, to be replaced by chief financial officer Nick Read.

Colao returned the group profit in the year to 31 March and guided to further growth in 2019 despite revenue being held back by increased competition in Italy and Spain.

Full year numbers came in just ahead of City forecasts, with revenue falling 2.2% year-on-year to €46.6bn but beating the average estimate of €46.2bn as organic service revenue -- a key metric for the company -- was up 1.6%, with the fourth quarter up 1.4% as a record number of fixed-line and converged customers in the quarter.

Adjusted earnings before interest, tax, depreciation and amortisation increased 11.8% to €14.7bn, pipping the €14.5bn analyst consensus. Excluding one-offs from roaming, handset financing and settlements, underlying EBITDA grew a solid 7.9%.

With free cash flow up 33% to €5.4bn, if excluding payments for mobile spectrum, a final dividend of 10.23 cents per share was declared, up 2.0%, and giving a total dividend for the year of 15.07 cents.

Colao said investment in network quality had supported commercial momentum, with record number of customers in the fourth quarter, mobile data usage growing strongly and both revenues and margins growing from business customers, despite roaming headwinds.

He said the spinning off into a merger of the India business was expected to close "imminently", with an Indian towers merger also agreed, followed by last week's agreement of the acquisition of Liberty Global's cable assets in Germany and Central and Eastern Europe.

"We expect to sustain our profit growth in the year ahead, despite the arrival of a new entrant in Italy and competitive pressure in Spain, supported by the third year in a row of lower net operating costs. Our primary focus continues to be to accelerate the 'Digital Vodafone' programme, which we believe is a unique opportunity to enhance our customers' experience, generate incremental value and improve cost efficiency," he said.

For the current year, with expected entry of Iliad into the Italian mobile market and Spain also likely to see declining service revenues, the guidance was for adjusted EBITDA growth of 1-5% to €14.15-14.65bn and free cash flow of €5.2bn. Analysts had pencilled in EBITDA of €14.5bn.

With Colao stepping down a decade after was handed the CEO role, chairman Gerard Kleisterlee hailed the "strategic visionary who has overseen a dramatic transformation" and talked up the talents of his successor.

"Nick has been the co-architect of the group's strategy together with Vittorio, combining extensive international operational and commercial leadership with world-class financial acumen. I am confident Vodafone will benefit greatly from his experience, insight and wisdom in his new role as group chief executive.

Deputy CFO Margherita Della Valle, who has been with the company since 1994, will succeed Read as group CFO and will join the board.

REACTION AND ANALYSIS

UBS said Q4 results were ahead of expectations, with organic service revenue growth better than the 1.1% growth foreseen.

Full year EBITDA was 0.7% ahead of consensus, driven by a €90m one-off benefit in Germany due a legal settlement over carriage fees.

Guidance for 2019 EBITDA gives a mid-point of €14.4bn that is "marginally light" versus consensus, "and the delta relates to timing issues around the removal of 28 day billing in Italy (this was unwound in April but offsetting price rises will only come in end of May) and also some softness in Spain".

UBS said the consensus is likely to be for close to 0% service revenue growth for Q1/Q2 on an IAS18 basis, or on an IFRS15 basis that adjusts for handset financing, underlying service revenue growth may be closer to +1% for Q1/Q2.