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Vodafone Forecast Sends Stock Soaring

Light Reading
News Analysis
Light Reading
5/29/2007
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Vodafone Group plc (NYSE: VOD) stock hit a five-year high Tuesday as the company sounded a bullish note on its annual earnings and announced a higher revenue guidance for its 2008 financial year. (See Vodafone Reports Annual Results.)

The operator cut its loss for the fiscal year ended March 31 to £5.43 billion (US$10.3 million), down from 21.9 million the previous year. Revenues were 6 percent higher at £31.1 billion ($61.7 billion), while adjusted earnings per share were up by 11.4 percent to 11.6 pence.

In its guidance for the 2008 financial year, Vodafone said it expects sales of between £33.3 billion ($65.97 billion) and £34.2 billion ($67.75 billion). Analysts had predicted sales of £33.5 billion ($66.36 billion).

Shares in the operator closed 5.48 percent higher at 159.7 pence ($3.16) on the London Stock Exchange . The stock had declined as much as 5 percent in March as the company warned of falling voice margins. (See Vodafone Data Up, Shares Down.)

But despite the bullishness on its performance, the company acknowledged that conditions in Europe remain "challenging." Vodafone CEO Arun Sarin told a news conference this morning: "We have got good growth drivers but, equally, these growth drivers are being offset by pricing and regulatory pressure."

Ovum Ltd. analyst John Delaney writes in a research note that "the fundamental long-term problem of the business, although being tackled, is still far from being solved. That problem, of course, is the heavy concentration of Vodafone's business in the mature markets of Western Europe."

Vodafone has tried to combat market saturation by introducing new tariffs and rolling out broadband, 3G, and HSDPA to woo customers, as mobile voice revenues fell around 15 to 20 percent in Europe. It's also made some moves towards back-office outsourcing and consolidation that should have an effect on future margins.

Vodafone's EBITDA was up slightly from £11.77 billion ($23.32 billion) to £11.96 billion ($23.69 billion), but fell short of analysts' forecasts of £12.13 billion ($24.03 billion) according to Reuters. The company's profit margin was at 38.7 percent, down from 39.6 percent last year.

Delaney notes: "We see that margins remain under pressure, despite some large-scale cost-saving projects, showing that regulatory and competitive pressures on prices are continuing to take large bites out of Vodafone's revenues in its biggest markets."

Among those pressures, the European Parliament voted last week in favor of a regulation requiring operators to cut roaming charges for customers using their phones abroad. (See EC Reaches Agreement and V'fone Comments on Roaming.) Sarin said the 2008 guidance already takes the ruling into account, and the company expects revenues to take a hit of between £200 million ($396.20 million) and £250 million ($495.25 million) this year.

Part of Vodafone's strategy to offset slowing growth in Europe has been to expand into emerging markets, which now account for around 40 percent of its profits. Its operations in Egypt reported revenue growth of 41 percent; Romania grew by 28 percent and South Africa 22 percent. Its acquisition of Telsim in Turkey, completed in May 2006 has outperformed its expectations, clocking revenue growth of 37 percent.

Vodafone will start to see the benefits of its $11.1 billion ($21.99 billion) acquisition of fast-growing Indian operator Hutchison Essar during the current financial year, although, as Ovum's Delaney notes, it will be in investment mode for most, if not all, of the year. Sarin told the news conference that the company plans to invest £1 billion ($1.98 billion) in the operator this year, which will be rebranded as Vodafone Essar.

The operator last week introduced branded, low-cost, mobile handsets targeted at emerging markets, which it plans to introduce first in Egypt, Romania, and South Africa to help build its subscriber base in the low end of the market. (See V'fone Intros Low Cost Handsets .)

— Nicole Willing, Reporter, Light Reading

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