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Sales Squeeze to Drive Heavier Cutbacks at Vodafone

Iain Morris
7/25/2018

Incoming Vodafone CEO Nick Read said he would aim for even higher cost reductions this year than last to hit profitability targets after the UK-based operator came under renewed competitive pressure in some of its main overseas markets.

Following the arrival of new entrant Iliad (Euronext: ILD) in the Italian market, and facing big challenges in Spain and India, Vodafone Group plc (NYSE: VOD) reported a 4.9% drop in group revenues, to €10.9 billion ($12.8 billion), for its first quarter (covering April to June), compared with the year-earlier period.

Under new accounting regulations, Vodafone insisted the "organic" change in service revenues was an increase of 1.1%, but analysts have pointed out that growth in service revenues is tracking below Vodafone's midpoint target of a 3% rise in earnings before interest, tax, depreciation and amortization (EBITDA) for the current fiscal year.

Quizzed during a call with analysts about the moving parts of his projections, Read, who takes over from departing CEO Vittorio Colao in September, said cost reductions would be heavier this year than last. (See What to Expect From Nick Read, Vodafone's Next CEO.)

"I think you'll see that net operating costs, which were down €100 million [$117 million] in the last fiscal year -- we'll deliver a higher number this year," he said. "We see greater opportunity in Europe and in group activity where we are making faster progress."

Vodafone reported a 4.2% increase in adjusted EBITDA last year, to about €14.7 billion ($17.2 billion), despite a 2.2% fall in revenues, to around €46.6 billion ($54.6 billion).

A shift to online sales, the use of data analytics to improve returns from customer "retention spending" and investments in artificial intelligence to support customer management are already delivering results, said Read. "We are simplifying and rationalizing areas all the time, whether IT or network or procurement," he told analysts. "We'll expand in more detail in November in terms of where we are with traction."

The remarks would seem to threaten further job losses at Vodafone, which cut about 2,300 jobs last year, ignoring the divestment of its Dutch business (now a joint venture with cable giant Liberty Global). Vodafone finished March with a total of 106,135 employees, according to its latest annual report, down from 111,556 a year earlier. (See Vodafone Rewards Top Brass as Thousands of Staff Are Axed.)

Read said Vodafone had an opportunity to cut costs more rapidly than European incumbents that may face regulatory constraints.

Vodafone's share price was trading down 1.6% at the time of publication after today's trading update highlighted sales setbacks in some of the operator's biggest markets. Both Read and Colao, who spoke for the last time on a Vodafone earnings call, expressed disappointment with the performance of the share price, which has fallen more than a fifth since this time last year.

"It is clearly disappointing to be departing with the share price at this level," said Colao, whose overall compensation rose one third, to nearly €8 million ($9.4 million), in the last fiscal year. "It does not reflect the progress we've made."

Read partly blamed pricing adjustments to comply with new regulations for a 6.5% drop in Italian service revenues, to €1.23 billion ($1.44 billion), but acknowledged that Iliad's market entry had also had an impact.

The French operator recently claimed to have signed up more than 1 million customers to its low-cost service in its first 50 days of operation. Moody's, a ratings agency, thinks service revenues at Vodafone's Italian business will drop 4-5% next year as a result of competition from Iliad. First-quarter figures show that Vodafone lost 289,000 Italian mobile customers, leaving it with about 22 million at the end of June. (See Iliad Grabs 1M Customers by Day 50 of Italian Odyssey.)

"Iliad had a decent commercial entry and we're not surprised by the numbers," said Read. "When you analyze the type of customer we are losing, ARPUs [average revenues per user] are lower than average and usage is lower than average. There is a question about the sustainability of the [Iliad] offering."


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Vodafone is also under intense competitive pressure in Spain, where service revenues fell 2.2% on a purely organic basis, to €1.11 billion ($1.3 billion). Colao said the market represented an unusual case of four operators all providing bundles of fixed and mobile services.

Elsewhere in Europe there were setbacks in the UK, where service revenues dropped 4.9% organically, to €1.46 billion ($1.71 billion), because of handset financing charges. In Germany, where Vodafone is hoping to complete its takeover of Liberty Global's Unitymedia business later this year, service revenues were up 2.4%, to €2.55 billion ($2.98 billion), after growth in the base of contract customers and good momentum in the broadband market.

The Unitymedia deal has yet to be signed off by European competition authorities and has met resistance from German incumbent Deutsche Telekom AG (NYSE: DT), which thinks German regulators should be involved. But Read said Vodafone remained "confident" its submission would be heard in Brussels and secure the necessary approvals. (See DT CEO to Fight Vodafone-Liberty Deal and Vodafone Pounces on Liberty Cable Assets in €18.4B Deal.)

In India, where similar deal-making will see Vodafone's local subsidiary merged with rival Idea Cellular, the impact of price-based competition from Reliance Jio continues to weigh heavily on results, with Vodafone's service revenues down 22.3%, to just €955 million ($1.12 billion).

"Vodafone numbers out today paint a grim picture of the Indian market," said James Crawshaw, a senior analyst with Heavy Reading, in a LinkedIn post. "The entrance of RJio has left Vodafone and others scrambling to retain customers by offering them cut-price deals to stay."

Due to adverse currency effects, revenues from the Africa, Middle East and Asia Pacific (AMAP) business fell 7.9%, to €2.65 billion ($3.1 billion). Vodafone reckoned the organic change in AMAP service revenues was an increase of about 7%.

Despite the various signs of pressure, executives insisted the operator's strategy was delivering gains in broadband market share as well as a reduction in churn in all markets bar India, Italy and Spain.

Outlining some of his other strategic priorities, Read said he would focus on driving churn to even lower levels and prioritize Vodafone's expansion into the market for bundles of fixed and mobile services.

"Both the board and the management team are highly frustrated by our recent share price development, which does not reflect the fact that the majority of our business is performing well," he said. "We are directing this frustration into an even stronger focus on execution."

— Iain Morris, International Editor, Light Reading

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