International telecom giant Vodafone Group Plc. (VOD) has announced fiscal 2010 results. The world’s largest wireless carrier by sales posted adjusted (excluding one-time items such as impairment charges) earnings per ADS of US$2.56, beating the Zacks Consensus Estimate of US$2.49.
Net profit surged to £8.6 billion (US$13.7 billion) from £3.08 billion (US$4.9 billion) a year ago, boosted by higher sales, lower impairment losses and reduced tax expenses. The year-ago quarter’s profit was dented by a £5.9 billion ($9.4 billion) impairment charge on the carrier’s operations in Spain, Turkey and Ghana.
Consolidated revenues leapt 8.4% year-over-year to reach £44.5 billion (US$71 billion) on the back of favorable exchange rate swings and healthy contribution from the operator’s Asia-Pacific and Middle East operation which offset weak performances in the key European markets.
However, the healthy results were eclipsed by concerns engulfing the carrier’s Indian operation (Vodafone Essar), which is becoming increasingly susceptible to competition-driven pressure on voice pricing and the local regulatory policies, which have opened the door to new mobile operators in an already crowded market. Pressed by aggressive price competition and high spectrum prices, Vodafone recently wrote down the value of its stake in Vodafone Essar by £2.3 billion ($3.7 billion).
Service, Data & Fixed-line Revenues
Group service revenue (94% of total sales) increased 8.9% year-over-year to £41.7 billion (US$66.6 billion). Excluding the impact of exchange rate swings and mergers/acquisitions (organic basis), group service revenue declined 1.6% year over year.
Consolidated data revenue climbed 33% to £4.05 billion (US$6.5 billion), boosted by expanded market penetration of data-heavy smartphones across Europe. Revenue from fixed-line services increased 21% to £3.3 billion (US$5.3 billion) driven by healthy broadband subscriber accretion. Vodafone now has roughly 5.4 million broadband subscribers in Europe.
Results by Segment
Europe
Revenues for the European segment increased 0.8% year-over-year (down 4.1% on an organic basis) to £29.9 billion (US$47.8 billion), helped by favorable exchange rate movements. Service revenues declined 3.5% organically as growth in Italy and Netherlands have been more than offset by declines across Spain, Germany and the UK, impacted by regulatory pricing pressure and intense competition.
Decline in voice revenue continues to offset growth in data. Revenues in Germany and the UK remains under pressure due to mobile termination rate (inter-operator fees) cuts. However, fourth quarter results from UK reflect a favorable trend, helped by the iPhone which Vodafone UK started selling in January 2010. Spanish revenues declined on account of lower voice revenues, impacted by a weak economy, price regulation and stiff competition.
The UK wireless market, Vodafone’s home turf, represents one of the fiercely competitive markets in Europe. Vodafone is facing aggressive price competition as it battles with major rivals for market share. Moreover, competition has intensified as Deutsche Telekom (DT) and France Telecom (FTE) recently combined their UK units, creating the largest mobile carrier in the region dethroning Telefonica (TEF) O2 UK.
Africa & Central Europe
The segment posted revenues of £8 billion (US$3.6 billion), up 45.9% year-over-year, driven by full consolidation of Vodacom, the largest mobile carrier in South Africa with a 55% market share. Organically, service revenue fell 1.2% as consistent growth at Vodacom was offset by declines in Central Europe. Service revenues at Vodacom increased 4.6% on an organic basis driven by solid performance in South Africa and healthy data revenue growth.
Asia Pacific & Middle East
The segment continues to perform in line with expectations. Revenue surged 11.4% year-over-year (8.6% organically) to £6.5 billion (US$10.4 billion), driven by continued healthy performance in India, the single biggest contributor to organic revenue growth. Service revenue increased 9.8% year-over-year driven by strong subscriber and data revenue growth. Service revenue in India increased 14.7% organically boosted by continued strong growth in wireless customer base amid intense voice price competition.
Subscriber Trends
During the year, Vodafone registered roughly 34.6 million (including 8.5 million in the fourth quarter) net new mobile connections across its operations, bringing the total subscriber base to 341 million (84% represented by prepaid).
India remains a key driver for subscriber growth with a net addition of 32 million customers (9.5 million in the fourth quarter), representing 83% of total net additions in the Asia Pacific & Middle East segment. Total cellular subscribers in India crossed 100 million at the end of fiscal 2010, accounting for 76% of the segment’s total subscribers.
In Europe, Vodafone registered a net addition of 737,000 subscribers during the year. However, the carrier lost 265,000 customers in this operating region in the fourth quarter due to losses across Germany and the UK. Verizon’s (VZ) mobile unit, Verizon Wireless, in which Vodafone holds a 45% stake, posted a net addition of 2.77 million customers with 698,000 added in the last quarter.
Cash Flow & Capex
Vodafone continues to invest in Europe to support network infrastructure quality and data growth. Capital expenditure for the year was £6.19 billion (US$9.9 billion), up 4.8% year over year. Free cash flow increased 26.5% year-over-year to £7.24 billion (US$11.6 billion), driven by cost-saving efforts.
Dividend Raised
Vodafone has raised the dividend for fiscal 2010 by roughly 7% to 8.31 pence per share. Moving forward, the carrier plans to raise its annual dividend by 7% over the next three years with a target of returning at least 10.18 pence a share to its shareholders by 2013. Vodafone has adopted a progressive dividend policy where the growth of dividends reflects the underlying cash performance of the entire company and is expected to gradually increase in future fiscal years.
Outlook Upbeat
Management has provided an optimistic outlook for fiscal 2011 with an adjusted operating profit expected in the range of £11.2 billion to £12 billion (US$17.9 billion to US$19.2 billion). Annual free cash flow is forecasted to exceed £6.5 billion (US$10.4 billion) while capital expenditure is expected to be at par with fiscal 2010. The company expects to return to organic revenue growth in fiscal 2011.
Vodafone is aggressively pursuing its cost reduction program that includes workforce reduction in Europe. The company maintains its annual savings target of £2 billion (US$3.2 billion) by 2013. Half of this targeted savings was achieved in fiscal 2010, a year ahead of schedule.
Vodafone continues to accelerate 3G wireless service deployments and expand network availability across Asia, Eastern Europe and Africa. The carrier has upgraded its 3G network to the HSPA+ standard with plans of launching commercial service as early as June 2010 (earlier than expected). The upgraded network will offer a throughput of 14.4 megabits per second.
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