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Vodafone Suffers in Japan

Vodafone Group plc (NYSE: VOD) is likely to face increasing pressure to jettison its struggling Japanese unit, Vodafone K.K., following first-half results that showed it's continuing to drag the company down.

Using IFRS accounting standards for the first time, Vodafone reported group revenues of £18.25 billion (US$31.72 billion), up 9 percent from a revised £16.74 billion ($29.09 billion) in the first half of last year, while profit was down 23 percent from £3.68 billion ($6.39 billion) to £2.82 billion ($4.9 billion). Revenues in Japan were down by 0.4 percent, propped up by equipment revenues -- service revenues from the unit dropped by 5 percent.

Falling margins in the Japanese business, coupled with an uninspiring outlook for the 2006-2007 financial year, sent the operator's share price tumbling -- the stock closed down 15.75 pence (10.86%) to 129.25 pence on the London Stock Exchange.

In a conference call with analysts, CEO Arun Sarin summed it up when he said, "I think the company is performing very well, outside of Japan...

"Seventy percent of the economic value of our company comes from 'Europe and other'... Japan is less than 10 percent of the value of the firm, and yet when you put it all together in group terms, the margin of the group is being severely impacted, principally because of Japan."

And that's set to continue "because we're investing in retention and acquisition of customers," he said. "We will see a further reduction in margins in Japan; not to the same extent that we're seeing this year, but a further reduction."

Revenues and margins for the group are also expected to be hit by more aggressive competition and lower mobile termination rates in fiscal 2007 -- factors Lehman Brothers pointed to in an analyst note that said "mobile forecasts in the market are too optimistic -- termination rate cuts, intensifying competition, and investment in data growth will all challenge the EBITDA outlook in particular."

Vodafone says it expects full-year revenue growth in the middle of its previous 6 percent to 9 percent range. Lehman had it pegged at 7 percent.

During the conference, Sarin wanted to talk about Vodafone's 3G plans -- including 65 percent coverage by the end of 2007 -- but analysts kept coming back to the business in Japan. "We feel good about the medium-term prospects of Japan and frankly that's why we’re taking the pain," Sarin responded.

So it's hanging on to Japan while it gave up on Sweden, selling its franchise there to (Nasdaq: TELN) because "it wasn't meeting our return requirements" thanks to the regulatory and competitive environment. (See Vodafone Sells Swedish Unit.)

"We are looking for exposure in high-growth markets, whether it's in Eastern Europe, it's in Asia, or it's in Africa," Sarin said. At the same time it dropped its Swedish business, the operator picked up a 10 percent stake in India's Bharti Tele-Ventures Ltd.. (See Vodafone Buys Bharti Stake.) Vodafone's also increasing its profile in another growth market, Latin America, today announcing an international roaming partnership with América Móvil S.A. de C.V. that includes dual-branding. (See V'fone Names Lat Am Partner.)

— Nicole Willing, Reporter, Light Reading

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