While Vodafone Group plc (NYSE: VOD) focuses on breaking in a new CEO, expanding its footprint in emerging markets, and dodging pressure from Verizon Communications Inc. (NYSE: VZ) to exit Verizon Wireless , it’s a good time to dissect the operator’s financial reports to see how well (or badly) the operator is performing. (See Sarin Steps Down as Vodafone CEO, Sarin's Bumper Bonus, and Vodafone Buys Into Ghana for $900M.)

The last time Unstrung graded Vodafone, we gave it an A-, mainly because of impressive increases in mobile data customers and revenues. But based on our highly sophisticated grading method, Vodafone gets downgraded to a B+ this time around. (See Carrier Scorecard: Vodafone and Carrier Scorecard: Vodafone.)

Why, you cry? Well, even though Vodafone still has a good data growth story -- in common with most mobile operators, thanks to the combination of high-speed downlink packet access (HSDPA) capacity and falling prices -– the operator will have to do more than post double-digit data growth figures to earn an A grade again. (See Data Prices Fall, Usage Booms and Good Times for 3G.)

And here are those double-digit figures: Vodafone’s data service revenues, not including messaging services, increased a whopping 52.6 percent to £2.2 billion (US$4.3 billion) in the 2008 financial year (ended March 31), compared with a year earlier.

But data services account for only 6.6 percent of the operator’s overall services revenue. Messaging service revenues, which were £4 billion ($8 billion) in fiscal 2008, accounted for 12.3 percent of service revenues. (See Vodafone Rakes in Data Revenues and Data Growth Pumps Up Vodafone .)

The operator attributes the growth in data services to business email and “PC connectivity devices,” such as USB modems. In addition, 3G devices proliferate at Vodafone. The operator reported 27 million 3G devices in service at the end of March, up 68 percent compared with a year earlier, and it will soon add the 3G iPhone to its device arsenal in 10 markets, including Australia, Italy, India, South Africa, and Turkey. (See Enterprise Data Drives Vodafone, VOD Acquires Arcor, and Vodafone to Sell iPhones.)

While more users take up data services, Vodafone has boosted the capacity on its 3G networks. The operators says its HSDPA networks have downlink speeds up to 3.6 Mbit/s and by the end of the year, some areas will even have up to 14.4 Mbit/s. Vodafone is also one of the operators leading the charge to the next-generation and so-called 4G technology, Long-Term Evolution (LTE). (See The Fastest 3G Yet, Vodafone's Blazin' 3G Upgrade, Faster 3G, Vodafone Pumps Up HSPA, Vodafone Plans LTE Powwow, Sarin: We Need 4G Convergence, China Mobile Joins LTE Threesome, and Verizon Goes LTE.)Overall, Vodafone’s fiscal year 2008 revenues were up 14 percent to £35.5 billion ($70 billion). Operating profit for 2008 was £10 billion ($19.7 billion), up from a loss of £1 billion ($2 billion) at the end of the 2007 financial year. Subscriber numbers were up 41 percent to 229.7 million. Average revenue per user (ARPU) was down 18.8 percent for the group. (See the table below and Vodafone Reports Full Year.)

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But, as the table below shows, in highly competitive and saturated European markets, Vodafone still struggles.

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In Germany -- Vodafone’s largest European market in terms of customers -- service revenue was down 4.8 percent to £5.1 billion ($10 billion) compared with the previous year. And ARPU in the fourth quarter of 2008 was down 12 percent compared to the same period in 2007. The numbers from Germany show how heavily price pressures weigh on Vodafone in mature markets. The operator has had to cut prices to stay competitive while at the same time meeting regulated price reduction requirements for mobile termination rates and roaming charges. (See Carriers Under Siege From EC.)

For example, a new messaging tariff introduced to German pre-pay customers boosted message volumes by 8.8 percent, but messaging revenue fell by 8.7 percent to £710 million ($1.4 billion).

In the U.K, however, new messaging bundles drove usage up 36.7 percent in 2008, compared with the previous year, and messaging revenue was up 21.4 percent to £923 million ($1.8 billion). (See Vod Slashes 3G Prices.)

Service innovation
The pressure to innovate on data services and applications has never been more keenly felt for mobile operators. Vodafone has done well in the past year with new services, such as Omnifone Ltd. 's MusicStation music subscription service.

The operator has also teamed with Nokia Corp. (NYSE: NOK) to integrate Vodafone's Internet services onto certain Nokia devices. And it looks as though Vodafone's partnership with MySpace is also starting to bear fruit, with the introduction of a new social networking service called Vodafone Music Reporter. (See Bowl Games Go Online, Vodafone Opens the Ovi, Vodafone Gets Social, and Vodafone Takes MySpace Mobile.)

Also, in terms of new tariffs, Vodafone UK was the first operator to include unlimited mobile Internet access (subject to a fair usage policy of 500GB per month) from handsets with monthly tariff bundles starting at £25 ($49) per month. The new prices were introduced in the beginning of May.

Eventual convergence
Vodafone has stitched together a fixed-line services strategy through acquisitions and partnerships. The operator most recently acquired the remaining 26.4 percent of German fixed-line operator Arcor AG & Co. KG that it didn’t already own for $735 million in cash. But so far, Vodafone has just 3.6 million fixed-line customers in 13 markets, mainly in Germany, Italy, and Spain. (See Vodafone Splashes Out on Acquisitions and VOD Gets Fixed in Italy & Spain.)

The operator’s home zone services Vodafone@Home now total 4.4 million users, which was up 33 percent in 2008 compared to 2007.

Emerging markets fuel growth
Vodafone’s operations in emerging markets, as well as its 45 percent stake in Verizon Wireless, contributed significantly to the operator’s top line growth in 2008. The operator reported strong service revenue results from Egypt, India, Romania, and Turkey, for example. The operator’s recent acquisition of a 70 percent stake in Ghana Telecom and the ongoing negotiations to increase its stake in South Africa’s Vodacom Pty. Ltd. are good moves. (See Vodafone Buys Into Ghana for $900M.)

Vodafone does well to expand into emerging markets and to have built up converged service offerings in many markets, but the operator struggles in the saturated, competitive Western European markets.

Despite strong growth in data services in Europe and elsewhere, Vodafone needs to stem ARPU and service revenue declines in Germany, in particular. So while it's growing its data revenues and displaying a fair amount of innovation in terms of new services and pricing structures, we’re downgrading Vodafone to a B+ on this scorecard.

Watch out for the data revenue growth numbers when Vodafone publishes its next key performance indicators (KPIs) on July 22, as it'll be interesting to see whether the introduction of the unlimited mobile Internet tariffs have any impact.

— Michelle Donegan, European Editor, Unstrung