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Vodafone Data Up, Shares Down

Light Reading
LR Mobile News Analysis
Light Reading
3/30/2007

Mobile data revenues are set to surge across Europe on the back of unprecedented corporate and consumer demand, said Vodafone Group plc (NYSE: VOD) executives today at an investor event focused on the performance of its flagship U.K. and German divisions.

Investors, meanwhile, are more concerned about threats to profit margins in the group’s core voice business, driving shares down 5 percent in trading on the London Stock Exchange today.

At face value, the data story is a good one. Non-messaging data revenues now account for 6.2 percent of revenues across Vodafone's European properties, which together generated revenues of £12.5 billion (US$24 billion) and free cashflow of £3.2 billion ($6.3 billion) in the first half of its fiscal year 2007.

Driven by demand for handheld business devices, consumer interest in “open” Internet services, and mobile broadband services over 3G High Speed Packet Access (HSPA) networks, mobile data is now the group’s number one strategic growth priority in Europe. “It’s a very high revenue and high margin opportunity for us,” said Vittorio Colao, CEO of Vodafone Europe.

Against a backdrop of declining margins and flat revenues in the core voice business, non-messaging data (i.e., excluding SMS) grew at an average of 40 percent year-on-year across Europe in the company’s third quarter, with peak growth of 58 percent in Germany.

Colao specifically identified the capabilities of the group’s HSPA networks, set to be upgraded to deliver peak data rates of 7.2 Mbit/s later this year, and a redesigned “Internet platform” that would be more open to third-party applications and services, as the underlying enablers for growth.

At Vodafone UK, which generated revenues of £2.5 billion ($4.9 billion) and cash of £400 million ($788 million) in the first half of fiscal year 2007, non-messaging data revenues grew to £191 million ($376 million) in the six months to December 2006, up from £132 million ($260 million) in same period of 2005. Of this, just over £60 million ($118 million) is attributed to the operator’s 216,000 3G data card users.

Speaking about Vodafone UK’s tentative moves into the fixed broadband market, Vodafone UK CEO Nick Read described the strategy as “defensive” and said they see much better opportunities in the mobile data market. Talk of bundling mobile services with broadband, TV, and fixed-line telephony, was roundly dismissed. “We’re seeing no evidence at all there is a consumer need or demand for a 'quad-play,' ” said Read.

At Vodafone Germany , which generated revenues of £2.8 billion ($5.5 billion) and cash of £1 billion ($2 billion) in the first half of fiscal year 2007, based on January 2007 figures, non-messaging data grew to €650 million ($869 million) in annualized revenue. Of this, consumer accounted for €350 million ($468 million) and enterprise €300 million ($400 million).

In the consumer segment €150 million ($200 million) is attributed to recurring subscription revenues and €200 million ($267 million) to non-recurring revenues, such as games and music downloads. In the enterprise segment, sales doubled over the last 12 months, with Vodafone taking market share. 3G subscriptions have risen from 1.7 million in March 2006 to 3.1 million in February 2007, said Fritz Joussen, CEO of Vodafone Germany, with “no indication this will slip.”

The problem for Vodafone is that, while its outlook for data revenues is clearly improving, investors are concerned that data and value-added services simply can’t grow fast enough to pick up the slack in its core voice business, where margins are under attack from lower prices and growth in off-net minutes driving up interconnect costs.

Add to this regulatory action on mobile termination fees and cross-boarder roaming, and investors appear less than convinced by Vodafone’s European growth strategy. Shares were down 5 percent in trading on the London Stock Exchange today.

A Webcast of the Vodafone investor event is available here.

— Gabriel Brown, Chief Analyst, Unstrung Insider

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