Vodafone upbeat despite fall in revenue

Mobile telecoms giant Vodafone posted a trading update for the quarter to 31 December on Thursday, reporting solid growth but disappointing investors with full-year guidance.

The FTSE 100 firm said the full year would see free cash flow of at least €4bn but the board said it only expected to hit the lower end of its organic EBITDA growth range of 3-6%

In the most recent quarter Vodafone generated 1.7% growth in group organic service revenue, with Europe accounting for 0.7% of that growth and Africa, Middle East and Asia-Pacific (AMAP) 3.9%.

Its European growth continued as average revenue per user (ARPU) stabilised, as the UK fell 3.2% but Italy climbed 3.0%, Germany was up 1.8% and Spain 0.8% firmer.

It said growth in AMAP slowed due to competition in India, with a 1.9% fall in that country, 4.0% growth at Vodacom, and 15% growth in Turkey.

On a reported, balance sheet basis, group revenue was down 3.9% during the period, with Europe falling 4.6% year-on-year to €8.88bn and AMAP off 2.4% to €4.48bn.

Its alternative performance measure, group service revenue, was also down 3.2% across the group, with Europe falling 3.6% to €8.06bn and AMAP down 2% at €3.98bn.

Ongoing 4G adoption was driving data growth, the board reported, with 4G customers up 7.6 million to 64.6 million and data volumes up 53% during the period.

Vodafone reported strong fixed momentum led by Italy and Spain, with 417,000 total broadband net adds of which 262,000 were on-net.

Heightened price competition

Its enterprise outperformance continued as well, with growth of 3.3% driven by fixed market share gains and AMAP mobile.

“Our overall performance in Europe and Africa remained strong during the third quarter, reflecting good execution,” said group CEO Vittorio Colao, who reconfirmed guidance for the year.

“In Europe, service revenue growth continued, led by Italy, Germany and Spain. Mobile contract ARPU continued to stabilise, reflecting the successful adoption of our 'more-for-more' propositions, while we remain Europe's fastest growing broadband company, illustrating our effective convergence strategy.

“In the UK we have made good progress in improving customer service but face heightened price competition in Enterprise.”

Colao said that in the AMAP region, Vodafone’s strong organic performance in South Africa and Turkey was partially offset by India, where the sector was affected by free services from new entrant, Jio.

“We anticipate intense competitive pressure in India in the fourth quarter and are taking a series of commercial actions, including the extension of 4G services to 17 leading circles."

Earlier this week, Vodafone began discussions about an all-share merger of Vodafone India with the Aditya Birla Group's Idea network as it looks to bring the extra economies of scale needed to combat Jio's threat.

Disappointed reaction

Vodafone dropped below 188p in early trade, its weakest since the trough of October 2014, but finished the day in positive territory.

Analyst George Salmon at Hargreaves Lansdown said the growth in South Africa and a robust performance in Europe was unlikely to be enough to distract investors from the continued uncertainty around the group’s Indian business, where competitive pressures seem to be intensifying rather than diminishing.

"Despite Vodafone dropping prices by 11%, the fact that the decline in customer numbers has accelerated will likely raise a few eyebrows, which might then furrow when investors see that this means profits are now likely to be at the bottom end of expectations."

He said the possible tie-up between Vodafone India and Idea, the second and third biggest networks in the country, could bring the extra economies of scale needed to combat the threat but it was "worth remembering that Reliance Industries, the group behind Jio, will have deep pockets too. A price war could be on the cards.”

Analyst Neil Wilson at ETX Capital noted that "earnings before nasties" for the third quarter were a bit better than expected, with the shares falling initially as full-year earnings were coming in towards the bottom of range after lacklustre performances in the UK and its chief trouble spot, India.

"India is proving a tough nut for Vodafone. It recently posted a €5bn write-down from increased competition in India. Free data from Reliance Jio means data revenue growth is sliding as data prices decline.

He said Vodafone could get a lift, however, as the Indian telecoms regulator is set to rule on whether the free offers from Jio are in breach of its rules on tariffs.

"This ruling is certainly one to watch because if the Telecom Regulatory Authority of India backs Vodafone, Idea and Bharti Airtel in their representations it could mean a rebound in data price and revenue growth. It’s understood that the decision has been made and will be conveyed to telcos today, according to PTI reports.

And there is more encouraging news in today’s update. 4G customers were up 7.6 million to 64.6 million and data volumes climbed by 53% as more consumers adopt 4G. Customer service issues in the UK are being ironed out, albeit slowly. Meanwhile consolidation in India should help mitigate cost pressures there. Vodafone shares could start to look a bit more appealing.”