Vodafone results: holds head high

This morning, Vodafone announced its annual results for the 2008 to 2009 financial year. Group revenues are £41.0 billion, up 15.6% (1.3%, excluding foreign exchange effects), with European revenue up 13.6%; outgoing voice usage in the region went up 9.4%. Group data revenue rose by 43.7% to £3.0 billion.

Profits are up 16.7% to £11.8 billion, before an impairment charge of £5.9 billion taken mainly in respect of Vodafone’s Spanish and Turkish operators. The group’s customer base has exceeded the 300 million mark for the first time, with its proportionate customer base standing at 303 million on 31 March.

Vittorio Colao, chief executive, commented: “These results demonstrate the impact of the early actions we took to address the current economic conditions and highlight the benefits of our geographic diversity. The business continues to generate cash strongly and we have made good progress in implementing the strategy announced in November. Data revenue grew to £3 billion for the year and our broadband and enterprise businesses continue to perform well. Our £1 billion cost reduction programme is ahead of plan and we continue to explore further ways to reduce cost. We maintain our tight focus on capital discipline and returns to shareholders.

“The economic downturn is affecting Vodafone in several ways,” continued Colao. “In our more mature European and Central European operations, voice and messaging revenue has declined, primarily driven by lower growth in usage and continued double digit price declines. Roaming revenue fell due to lower business and leisure travel. Enterprise revenue growth slowed as our business customers reduced activity and headcount. Double digit data revenue growth continued, as we actively market increasingly attractive network speeds, handsets and services into an under penetrated market.”

IDC research director, John Delaney, commented: “Given the toxic combination of market saturation and economic recession that is blighting the European mobile market, it’s an achievement for a European mobile operator to report growth in service revenues. True, there’s an element of luck involved; Vodafone is still benefiting from the weakness of its reporting currency against the currencies in which the majority of its revenues are gained. A large chunk of Vodafone’s revenue growth is also due to the general surge in demand for access to the internet over mobile networks.

“But Vodafone is now also reaping the fruits of some contentious decisions taken by its management in recent years,” continues Delaney. “Having resisted investor pressure to divest its stake in Verizon Wireless, Vodafone now benefits from the strong revenue and profit growth reported by the US operator following its acquisition of Alltel, and all in dollars too.” Verizon Wireless profit was 44.7%; the Alltel acquisition created largest US wireless operator.

Also benefiting the top line is Vodafone’s decision, three years ago, to extend its interests in emerging markets as a key objective of the operator’s corporate strategy. Vodafone’s Asian and African operators are contributing an increasingly important chunk of the growth in Vodafone’s total service revenues, Delaney said.

Vodafone has accelerated its £1 billion cost reduction programme, which will help it to offset the pressures of cost inflation and the competitive environment and invest in revenue growth opportunities. In the 2009 financial year, it achieved approximately £200 million of cost savings, which were partially offset by restructuring charges. It now intends to deliver at least 65% of the total programme in the 2010 financial year, ahead of plan.

Yet he added that cost savings of the magnitude promised by Vodafone are going to be increasingly hard to find, Delaney claimed. Several major cost reduction measures were already in place well before the November announcement, including the consolidated back office, the RAN-sharing joint venture in India, the outsourcing of IT to IBM and EDS, and the outsourcing of spares supply to Ericsson, commented Delaney: “One wonders where else Vodafone can still look for fat to trim. It seems that the operator has some ideas, though, given its commitment, announced today, to achieve at least 65% of the total reduction programme in the 2010 financial year.”

Delaney summed up: “Today’s results show that Vodafone is making the best of the hard times that we’re going through. But for the coming year, at least, those times are going to get harder still. The recession is set to hit people in the pocket throughout Europe, for at least the remainder of 2009. Mobile users on prepaid are not committed to a fixed monthly payment, so it’s easy for them to cut back on their mobile spending as times get leaner. In the worst case, they can even cut back to zero, and still have a phone that receives incoming calls.”

In Europe, almost two thirds of Vodafone’s customers are on prepaid, so Vodafone’s exposure to the danger of spending cutbacks is considerable, claimed Delaney. Vodafone may also be vulnerable to cutbacks among the business users that make up a high percentage of its customer base in the UK, for example, as those businesses continue to cut costs, shed staff who are mobile users, and in some cases disappear altogether.