Vodafone gets off to slow start but board pleased with performance

The FTSE 100 telco giant said first quarter organic service revenue grew 0.3% on an IAS 18 basis as emerging markets offsetting weakness in Italy and Spain, or rose 1.1% based on IFRS 15 accounting rules, which did not include the drag from UK handset financing.

IFRS 15 was adopted on 1 April for Vodafone's statutory reporting with Wednesday’s report showing its performance on both an IFRS 15 and an IAS 18 basis for comparative purposes.

Europe revenue declined 1.3% on an IAS 18 basis due to the drags from regulation and UK handset financing, but grew 0.5% if these factors are excluded.

Africa, the Middle East and Asia Pacific grew 7% on an IAS 18 basis, with growth that was faster than local inflation in South Africa, Turkey and Egypt.

India declined by 22.3%, which Vodafone said was due to price competition and marginal tax rate cuts, but was down only 1.4% compared to the fourth quarter.

Vodafone said its “growth engines” were supporting its “solid” commercial momentum, with mobile data traffic growing 57%, a total of 196,000 broadband net adds, and a record 289,0001 converged net adds.

Additionally, its enterprise segment grew 0.9%, or 2.0% excluding regulation.

Vodafone reiterated its guidance for underlying organic adjusted EBITDA growth of between 1% and 5%, and free cash flow pre-spectrum of at least €5.2bn.

“The group's organic service revenue growth slowed during the first quarter, in line with expectations,” said group chief executive Vittorio Colao.

“The majority of our operations performed well, with ongoing momentum in Germany, further underlying recovery in the UK and continued good growth in Africa, the Middle East and Asia Pacific, all of which helped to offset increased competition in Italy and Spain.”

Colao said the company’s commercial performance was “solid”, with further broadband market share gains in Europe, a record number of customers adopting its converged propositions, and the continued success of its internet of things platform.

“In India, where competition remains intense, we have now received conditional approval from the Department of Telecoms for the merger of Vodafone India and Idea Cellular, which we aim to close before the end of August, allowing us to unlock substantial synergies.

“The group's overall performance - including good progress in reducing absolute operating costs for the third year running - provides us with the confidence to reiterate our outlook for the year.”

Vodafone shares were down 1.6% to 174.86p by noon on Wednesday.

Analyst George Salmon at Hargreaves Lansdown said: "The long-standing problems with telecoms is that consumers want a better deal every time they renew a contract, and there’s little to differentiate between providers other than the price they charge. That means competition between networks can be fierce. Unfortunately, that’s something Vodafone is finding out the hard way, with pricing in Spain being reassessed as a result of extra competition, and the Indian business on the cusp of being combined with a rival in an effort to front up to new challenges.

"Still, there are some silver linings. Emerging market growth is strong, driven by Egypt, Turkey and South Africa, while more European customers are electing to take on multiple services from the group. Bundling TV, phone and broadband together is Vodafone’s solution to the age-old problem of customer retention, so investors will be keeping a keen eye on progress in from here on.”

While at first glance the results appear fine, but analysts at Societe Generale said scratching the surface showed "a tangible deterioration in year-on-year growth trends with more to come".

"The main driver was a significant deterioration in Italy", the analysts said, where revenue fell 6.5% compared to the 0.7% growth the preceding quarter. "Importantly, Spain and the UK also recorded a tangible deterioration in growth trends," they added, as Spanish growth swung from 1.0% to -2.2% and the UK from -3.4% to -4.9%.

Turkey's 'organic' growth of 14%, in euro terms was actually a 14.1% fall year-on-year. "This (partly) explains why VOD’s yoy statutory growth in service revenues came in a -4.2% vs the +0.3% recorded by VOD in organic service revenue."