Mobile services

Brexit, India Weigh on Vodafone Sales

Vodafone has reported a modest increase in service revenues for its first quarter but remains at risk in the UK from "Brexit," according to a leading analyst firm, and under huge pressure from new entrant Reliance Jio in India. (See What Hard Brexit Means for Vodafone, BT.)

On a purely organic basis, Vodafone Group plc (NYSE: VOD)'s service revenues were up 2.2% in the April-to-June quarter, to €10.3 billion ($12 billion), compared with the year-earlier period, thanks largely to an encouraging performance across European markets where it has taken steps to improve its service offerings.

Service revenues rose by 0.8% in Europe, to €7.6 billion ($8.9 billion), and by as much as 7.9% across its various markets in Africa, the Middle East and the Asia Pacific (AMAP), to about €2.43 billion ($2.8 billion).

The numbers looked far less impressive on a reported basis, however, due to foreign exchange effects and the deconsolidation of Vodafone Netherlands -- now part of a joint venture with European cable giant Liberty Global Inc. (Nasdaq: LBTY) (See Vodafone, Liberty Global Form Dutch JV.)

Total Group revenues were down 3.3%, to €11.5 billion ($13.4 billion), with sales dropping 4.8% in Europe and rising 1.2% across AMAP.

A leading analyst firm also warned that "Brexit" -- the UK's decision to quit the European Union -- could disrupt Vodafone's domestic business in the coming quarters. (See 'Brexit' Vote Hits BT, Vodafone and Brexit: It's Hard to See an Upside.)

"While these latest results show that Vodafone is operating a relatively stable business in many foreign markets, the impact of Brexit on its UK operations is already being felt," said Matthew Kendall, chief telecom analyst at the Economist Intelligence Unit, in emailed comments. "Although the rate of UK revenue decline slowed in this quarter, the falling value of the pound and the adverse impact of the abolition of EU roaming charges are areas of concern for its domestic business going forward."

Figures show the UK was the only one of Vodafone's European businesses to report an organic service revenue decline in the first quarter. Service revenues fell by 2.7%, to about €1.6 billion ($1.9 billion), while overall UK sales dropped 4.5%, to about €1.8 billion ($2.1 billion).

The operator does not report details of profitability in its trading updates but clung to its previous forecast that adjusted EBITDA will grow by 4% to 8% this year. Investors also seemed encouraged by the update, with Vodafone's share price up more than 2% during morning trading in London.

CEO Vittorio Colao said the operator had made a "good start to the year" and that Vodafone was gaining market share in the broadband sector thanks to customer interest in its "converged" offers, whereby a range of fixed and mobile services are sold in a single package.

Following takeover activity in Germany and Spain, Vodafone said it was now able to provide broadband services to 98 million European households -- an increase of 24 million compared with the year-earlier period.

Vodafone is still heavily reliant on wholesale deals with former state-owned monopolies, however. Just 36 million of those households were serviced by its own fiber or cable infrastructure, it said, although it also has "strategic" wholesale partnerships in place that cover another 5.1 million households.

Having added another 300,000 "broadband households" in the quarter, it now has around 15 million in total, including 6.5 million on its own networks. In Europe, about 3.8 million homes are "converged," it said, thanks largely to interest in the markets of Germany, Italy, Spain and the UK.

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The real black spot was the performance of Vodafone India, which has been badly bruised by the aggressive market entry of the Reliance Jio business owned by Indian billionaire Mukesh Ambani. (See India's Airtel Accuses RJio of Trying to Kill Competition.)

According to Vodafone's first-quarter update, reported revenues slumped by 8.7% in India, to about €1.4 billion ($1.6 billion).

RJio's market entry has triggered a wave of consolidation in India and Vodafone itself recently announced plans to merge its business with that of rival Idea Cellular Ltd. in a move that will unite the country's second- and third-biggest players.

Still awaiting regulatory approval of the deal, Vodafone expects to close the transaction sometime next year.

Despite the pressure from RJio, it insisted it had been able to retain its "high-value" customers and said trends were "stabilizing."

"These results show that its Indian operations are stabilizing somewhat, and the merger with Idea Cellular should help, although competition in the Indian market is unlikely to abate anytime soon," said the EIU's Kendall.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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