Vodafone’s stable results achieved with cost cutting not services

by Caroline Gabriel, Rethink Wireless

Vodafone has proved expert at managing expectations during the current downturn, a far cry from its flamboyant past, where bold gestures sometimes led to later writedowns and disappointments. A year ago it braced itself for a possible £1.1 billion ($1.84 billion) revenue shortfall by announcing a £1 billion cost cutting program. In fact, it has turned in a 9.3% year-on-year increase in revenues for the six months to September 30, and a generally stable set of results considering the turbulent climate. But rather than sitting on its laurels, it increased the cost cutting program to target a further £1 billion by 2012.

This shows how Vodafone is addressing the saturation and price competition in its core markets in western Europe in two ways – expanding in high growth emerging markets like India; and offsetting the pressure on margins that entails with aggressive cost reductions. Not all of the additional savings will come from actual overhead reductions, CEO Vittorio Colao implied, with some coming from efficiencies such as outsourcing, network sharing and economies of scale as Vodafone spreads its wings over a broader area. He said the carrier would deliver on its initial cost cutting target a year earlier than expected and the new wave would look for cuts in nearly all the operator’s territories, while the first round was focused on Europe.

“The £1bn cost reduction programme is expected to be delivered a year ahead of plan and we have extended this to a further £1 billion of cost savings by 2012. At the same time, we have maintained our capital investment at £2.6 billion in the first half, delivering further improvements in network quality and performance for our customers. We have continued to develop innovative services for businesses and consumers, such as Vodafone One Net and Vodafone 360, and to expand our fixed line services. We will continue our focus on the delivery of our growth strategy, particularly in data services,” Colao said in his statement.

The firm added: “We expect that around half of these savings will offset inflationary and volume pressures, and the remainder will be used for commercial reinvestment and margin enhancement.”

Still the world’s largest cellco in revenue terms, Vodafone reported six-month group turnover up 9.3% to £21.8 billion ($36.5 billion), though this was down 3% on an organic basis, and profit of £4.8 billion ($8 billion). Its lower cost base was the key factor in delivering a 2.4% increase in adjusted operating profit to £5.9 billion. EBITDA was up 2.9% to £7.5 billion.
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