Fiscal updates from Vodafone contain few surprises. Like Europe's other big service providers, it is no longer expected to deliver any real sales growth but rather limit the damage caused by overcompetitive markets, antagonistic regulators and, more recently, the pandemic.
Cutting expenses and primping assets have become the preferred methods for protecting profits.
There was no deviation from that story in the six months to September. A lockdown-era slump in international travel proved to be the latest headwind, blowing away some of the "roaming" revenues normally generated by jet setters.
Fortunately, margins held firm as Vodafone lopped another €300 million (US$355 million) off its operating expenses. It is firmly on track to slash opex by €1.2 billion ($1.4 billion) between 2019 and 2021. Savings of another €1 billion ($1.2 billion) are its target over the subsequent three years.
Thanks partly to those efforts, the full-year outlook was lifted slightly. Previously, Vodafone had expected earnings (before interest, tax, depreciation and amortization, or EBITDA) to be the same as last year's €14.5 billion ($17.2 billion), or a bit worse. It is guiding for between €14.4 billion ($17 billion) and €14.6 billion ($17.3 billion).
That and a bullish appraisal of underlying performance by Nick Read, Vodafone's CEO, lifted the company's share price 3% on the London Stock Exchange in noon trading.
This was despite a 2.3% year-on-year fall in first-half revenues, to about €21.4 billion ($25.3 billion), and a 1.9% dip in adjusted EBITDA, to roughly €7 billion ($8.3 billion). The outlook reflects management confidence that Vodafone's second half will be stronger.
"We expect EBITDA in the second half to be on the right side of zero and this is what we factored in upgrading guidance to the upper end of the outlook range," said Margherita Della Valle, Vodafone's chief financial officer, during a call with analysts.
Reasons to be cheerful
She is upbeat for several reasons.
For one thing, seasonal factors mean the roaming business is less important outside the summer months.
More importantly, Vodafone's operational performance continues to improve in some of its main markets. Excluding the roaming business, its service revenues grew 1.5% in the recent second quarter.
Across the Vodafone empire, the number of mobile contracts and broadband customers was higher at the end of September than a year earlier. Read was visibly delighted this morning by a six-percentage-point improvement in Vodafone's net promoter score, a third-party measure of customer satisfaction.
The story about cost savings is even more compelling. "All the KPIs [key performance indicators] are progressing at the same pace as before or have been accelerated," said Della Valle.
A shift in consumer behavior amid the pandemic has allowed Vodafone to drive through changes. The most notable is probably a recent investment in new digital sales platforms as buying habits have moved online.
In the second quarter, more than a fifth of contract mobile and fixed sales in Germany, Italy, the UK and Spain were fully automated. That meant additional stores could be closed. A total of 728 have disappeared in the last two years.
Still, more than €400 million ($473 million) in savings has come from consolidating back office activities into shared service centers. Three now exist – in Egypt, India and eastern Europe – allowing Vodafone to shutter facilities catering to smaller geographical areas.
A well-documented investment in "TOBi," an automated customer service assistant, has also paid off. Nearly two-thirds of customer interactions with the "chatbot" now occur without any intervention by Vodafone staff.
Dark days for staff and Huawei
While investors cheer, employees might not. The latest headcount details were not provided in Vodafone's first-half report, but its annual reports show that headcount has dropped from about 111,700 in the 2015 fiscal year to just 95,200 in 2019.
Divestment activity, including the deconsolidation of its India business, explains several thousand cuts. Other workers have been victims of automation or "digital transformation" – the telco sector's preferred euphemism.
A future reduction in capital intensity is also now dangled as a possibility.
Last year, Vodafone invested about 16.5% of its revenues in capital expenditure. The recent network-sharing agreements it has struck in several European markets could lower that figure in 2022 and beyond, said Della Valle.
Then there is Vantage Towers, the towers spin-off, which is preparing for an initial public offering in Frankfurt early next year and could be valued at more than $20 billion. It promises "exciting growth opportunities" and "good, predictable cash flows," said the Vodafone CFO.
Concern still surrounds Huawei, the controversial Chinese vendor that supplies much of the equipment for Vodafone's European mobile networks.
Regulatory wariness has already compelled Vodafone to begin stripping Huawei products out of its European "cores," the control centers of the networks.
The uncertainty is whether European authorities will eventually seek to restrict Huawei in the much costlier radio access network, as the UK has already done. "We are engaged with each of the governments on that," said Read this morning.
His other mission is to persuade European regulatory authorities that his business deserves fairer treatment in the future.
"We need to create a healthier market structure and that is about saying our shareholders need to earn an adequate return," he said.
Vodafone has started publishing its return on capital employed, another measure of profitability, and says it must have a pathway in individual markets for this to exceed its local cost of capital in the next three to five years.
On that front, there was a firm warning for Portugal over 5G auction plans that Read considers outrageous.
"A new entrant was being given advantageous terms," he said, expressing dissatisfaction with a revised scheme. "In my opinion, they have not gone far enough. We still believe this is state aid and contravenes European telco law."
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— Iain Morris, International Editor, Light Reading