Vodafone results show Europe stabilizing

Long downturn in its home region may be coming to an end, but growth all comes from emerging markets

By Caroline Gabriel

Vodafone's quarterly results showed a familiar pattern, with emerging market growth somewhat offsetting European slowdown, but there are also signs that the long stagnation in its home region may be ending.

The first half of 2014 may mark "the low point of its European trends", Macquarie Research analyst Guy Peddy told Bloomberg. Performance there has stabilized, though Vodafone is still having to pour large sums into its networks to shine in a region which is both recession-struck and hugely competitive. "The company is playing network catch-up and investing heavily," said Peddy. Vodafone will invest £19bn ($32bn) on its network improvements over the next two years.

The UK-based giant pleased the City of London with a smaller than expected decline in revenue in its first fiscal quarter, mainly driven by burgeoning mobile usage in India and parts of Africa. Overall, service revenue was down 4.2% year-on-year to £9.4bn, slightly better than the 4.4% drop predicted by analysts. Total revenue was down 4.4% to £10.2bn, excluding acquisitions and currency fluctuations.

In Europe, which brings in about 65% of service revenue, the operator said there was "evidence of commercial improvement" in Germany, Italy and the UK, although all three suffered declines in revenue. Overall, European service revenues were down 7.9% year-on-year, with Italy recording a 16.1% fall.

Germany, the biggest market by revenue for Vodafone, is starting to recover from last year's network quality problems, but Spain is still showing few signs of turnaround as prolonged economic downturn drives customers towards cheaper devices and plans. Vodafone recently announced the acquisition of local fixed line provider Ono, as part of its region-wide strategy to invest in wireline infrastructure and create a quad play to rival that of cableco Liberty Global.

"Our performance is beginning to stabilize quarter-on-quarter in several of our European markets, with customer appetite for 4G services clearly growing," said CEO Vittorio Colao in his statement, sending the stock up 2.1% to 202p (though it has lost 33% so far this year, before the results).

The operator's Africa, Middle East and Asia business group saw a 4.7% rise in service revenues and the largest market in this division, India, enjoyed the best performance, with the shift to 3G spurring a 10.3% revenue improvement.

The African regional operator Vodacom, in which Vodafone holds a 65% stake, said revenues were up 4.3%, driven by a 23% increase in data income, especially in Tanzania, Mozambique and Lesotho.

Vodafone had warned in May that profits would be hit during the full fiscal year, which ends in March 2015, by the huge Project Spring infrastructure upgrade plan as well as European price wars. It has forecast that EBITDA will fall to a range of £11.4bn to £11.9bn, down from £12.8bn last year.

In the face of Vodafone's acquisition spree - which is reminiscent of its glory days under Chris Gent and includes the major Kabel Deutschland purchase - credit ratings agency Moody's recently stripped the firm of its A3 status, reducing it to Baa1, the third lowest grade. Moody's commented in a statement: "The renewed investment focus from Project Spring could turn out to be a powerful competitive advantage for Vodafone, but the company will have to demonstrate that it is able to regain pricing power from this network differentiation strategy."

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