Carrier Scorecard: Vodafone 649449

Unstrung's red pen is poised and ready to grade Vodafone Group plc (NYSE: VOD) on its half-year performance for the six months ending September 30. The operator reported stellar growth on data service revenues, but how is the rest of the business doing? (See Vodafone Rakes in Data Revenues and Vodafone Reports H1 Results.)

Vodafone reported half-year revenues of £17 billion (US$35 billion), up 9 percent from the same period last fiscal year. The operator reported an operating profit of £5.2 billion ($11 billion). Vodafone added 20.5 million subscribers in the first half of this year, bringing its total customer base to 241.5 million worldwide. (See Table 1.)

{Table 1}

The star of the half-year earnings report was the boost in data revenues, which were up 48.8 percent to £967 million ($2 billion) in the first half of this year, and which accounted for 6 percent of Vodafone's total service revenues. The operator now has 21.4 million registered 3G devices. (See Vodafone Launches HSUPA, V'fone Adds HSPA Handsets, and Vodafone Soups Up HSDPA.)

The strong data growth is driven by Vodafone's business customers. In Europe, enterprise services accounted for 28 percent of Vodafone's service revenues, which totaled £12 billion (US$25 billion) in the first half of this fiscal year. (See Enterprise Data Drives Vodafone.)

But Europe, unsurprisingly, remains Vodafone's most challenging region. Total European revenues for the first six month of the fiscal year were £12.7 billion ($26 billion), which is up 2 percent, while European operating profit was down 2.3 percent to £3.3 billion ($6.8 billion).

In Germany and Italy, for example, monthly average revenue per user (ARPU) is down 14.5 percent and 17 percent, respectively. (See Table 2.)

{Table 2}

The hit to European profitability was in part due to regulated price cuts and competition. Vodafone CEO Arun Sarin described the regulatory pressures in Europe this financial period as "double and triple whammies." These include mobile termination rate decreases, roaming price cuts, and the Bersani decree in Italy, which prevents operators from charging a fee to customers for topping up their prepaid cards. (See Carriers Cut Prices, ERG Issues Guidance, and EU Adds Mobile Law.)

Vodafone now has fixed broadband capabilities in 13 markets, with the acquisition of Tele2 AB (Nasdaq: TLTO)'s assets in Spain and Italy. Fixed-line broadband services should help Vodafone to grow its service revenues and introduce fixed and mobile bundles. (See VOD Gets Fixed in Italy & Spain and Vodafone Buys Tele2 Units.)

Vodafone is also among the operators leading the development of femtocells, or home base stations, which will improve voice and data coverage in homes and offices. (See Vodafone RFP Fuels Femtocells and Vodafone Picks Femto Vendors.)

While the Tele2 acquisition and the work on femtocells are examples of potential revenue growth drivers, the operator will have to focus more on devising cost-cutting schemes, such as the network sharing partnerships inked with Orange UK in the U.K. and with Telecom Italia (TIM) in Italy, in these markets. (See Vodafone & Orange Share 3G and Vodafone, TI Share Sites.)

Vodafone's other business area, called EMAPA, covers operations in Eastern Europe, Middle East, Africa, and Asia, and the Pacific, as well as the U.S. EMAPA revenues account for 25 percent of Vodafone's overall revenues. These markets had revenue growth of 40 percent to £4.3 billion ($8.8 billion), and operating profit was up 6 percent to £1.7 billion ($3.5 billion).

Vodafone has lined up partnerships with big Internet brands, like Google (Nasdaq: GOOG) and eBay Inc. (Nasdaq: EBAY), to develop its mobile Internet service, which now has 500,000 customers since it was launched in May. But it will take more than name-checking to make a viable business out of the mobile Web or boost the takeup of its own portal services on Vodafone Live. (See Vodafone Opens the Internet, Vodafone, MySpace Partner, Vodafone Takes MySpace Mobile, Vodafone Takes EBay Mobile , Vodafone Offers YouTube, and Vodafone, Google Partner.)

Last time we graded Vodafone, we gave it a B+. This time 'round we're marking Vodafone up to an A- (our first A grade since we started grading the mobile operators), giving it credit for the strong growth in data service revenues.

— Michelle Donegan, European Editor, Unstrung