Now that Vodafone Group plc (NYSE: VOD) has reported financial results for the first half of the year, Unstrung's trusty grading system will be put to good use again as we grade the operator on its performance. (See Vodafone Adjusts to Hard Times .)

For a quick review, we downgraded Vodafone to a B+ from an A- on the last scorecard because it had not done enough to stem the falling average revenue per user (ARPU) in its key European markets. So, how did the operator do in the first half of its current financial year? In short, not well. (See Carrier Scorecard: Vodafone and Vodafone Wobbles on Outlook.)

Vodafone's half-year results benefited in a big way from changes in the pound/euro exchange rate. Check out Table 1 below for the details. For example, the reported revenue increase for the first half is 17 percent year-on-year, but without taking into account favorable changes in the pound/euro exchange rate, revenue increased just 0.9 percent.

{Table 1}

On the bright side, mobile data revenues grew 48 percent to £1.4 billion (US$2 billion), compared with the same period last year. And 3G devices are proliferating. At the end of September, Vodafone had 33 million 3G devices on its network, including handsets, PC cards, and USB sticks, which is a 10 percent increase compared to the previous quarter. (See Storm Brewing for Verizon, Vodafone, Dell, Vodafone Strike Deal, and Vodafone UK, RIM Intro Bold.)

But while some still refer to a global recession in the future tense, Vodafone is already in the throes of the economic downturn in Europe, and there are signs of slowing growth in some of its emerging markets.

Trouble in Europe
Vodafone has long struggled to stem falling ARPUs in its four big European markets -- Germany, Italy, Spain, and the U.K. Now, with the economic slowdown and evidently lower consumer spending, particularly in Spain and the U.K., Vodafone's troubles have deepened in Europe.

Vodafone's reported revenue for Europe was up 14.3 percent to £14.4 billion in the first half of the year, compared with the same period last year. But on an organic basis, revenue was actually down 1.1 percent.

Profitability in Europe took an even bigger knock. On an organic basis, European operating profit was down 7.7 percent. The decline came from the fall in revenue combined with higher customer acquisition costs, the operator explains.

And Vodafone's European ARPU appears to be in freefall, with steep declines particularly in Germany, Spain, and the U.K. (See Table 2 below.)

{Table 2}

The U.K. market was weaker than Vodafone expected, where service revenues fell 1.1 percent, mainly due to lower roaming revenues as a result of both regulated cuts and reduced business travel.

The good news for Europe is that revenue from mobile data services grew by 23.5 percent on an organic basis. Vodafone notes, however, that, while email applications continue to grow, content downloads have slowed.

Better tariffs
Vodafone signaled that it is ready to embrace flat-rate pricing. Vodafone CEO Vittorio Colao pointed to recent improvements in the SuperFlat flat-rate tariff in Germany as a key example of how the operator can increase revenues in Europe.

"The SuperFlat concept is a better tariff," says Colao. "It drives more usage and higher revenue. We need to be creative and aggressive on our pricing schemes."

India leads emerging market growth
In India, Vodafone India is rolling out 2,000 base stations per month and spent £600 million ($910 million) on capex in the first half of this year. Vodafone said it expects to spend more than £1 billion ($1.5 billion) in India for the full 2009 financial year that ends on March 30, 2009. (See India's Going Mobile! 52M New Subs in H1.)

The operator added 10.5 million customers in the first half of this year, bringing the total number of subscribers in the country to 54.6 million.

"India is a great market with strong fundamentals for voice and big opportunities for data," says Colao. "We expect strong revenue growth despite price pressures."

Overall for Vodafone's EMAPA region -- Eastern Europe, Middle East, Africa, Asia/Pacific, and Affiliates (namely, Vodafone's minority stake in Verizon Wireless ) -- revenue was up 25.7 percent, or 8.8 percent on an organic basis, in the first half of this year compared with the same period last year.

Colao launched a new strategy yesterday to help the mobile operator weather the economic storm: The new focus will be on cash generation and cost cuts. The operator wants to introduce better value flat-rate tariffs and hopes to find revenue growth in mobile data, enterprise, and fixed broadband services. In addition, Vodafone will not seek to expand into new emerging markets (See Vodafone Offers $2.5B for Vodacom Stake, Vodafone Buys Into Ghana for $900M, and Vodafone Turns Attention to Poland.)

While those plans for the future sound good, this scorecard judges Vodafone on its first-half performance. Given the dramatically falling ARPU in key European markets, Vodafone gets knocked down to a C+.

— Michelle Donegan, European Editor, Unstrung