Vodafone Group Plc (VOD) has announced results for full year 2011 (ended March 31, 2011). Adjusted earnings of £0.1675 per share (or earnings per ADS of $2.61) missed the Zacks Consensus Estimate of $2.77 but increased 4% from £0.1611 in the year-ago period.
The improvement was driven by higher profitability and lower shares outstanding as a result of the ongoing £2.8 billion share buyback program.
On a GAAP basis, net profit declined 8% year over year to £8 billion ($12.4 billion). The decline resulted from a £6.1 billion ($9.9 billion) impairment charge on operations in Spain, Greece, Portugal, Italy and Ireland due to higher discount rates on services and sharply increased interest rates.
Consolidated revenue increased 3.2% year over year to £45.9 billion ($71.4 billion) but remained below the Zacks Consensus Estimate of $73.1 billion. The year-over-year revenue growth was aided by favorable market trends across the globe, particularly through market share gains in India, Turkey and South Africa.
More than half of the revenue growth was organic (up 2.8%) and came largely from emerging markets. Group service revenue (93% of total revenue) grew 2.4% (2.1% on an organic basis) year over year to £42.7 billion ($66.4 billion).
On an annualized basis, consolidated data revenue climbed 26.4% to £5.1 billion ($7.9 billion). Messaging and fixed-line revenue increased 6% and 3.4% to £5.1 billion and £3.4 billion ($5.3 billion), respectively. However, voice revenue dipped 2.8% to £27.2 billion ($42.3 billion).
Adjusted operating profit rose 3.1% to £11.8 billion ($18.4 billion) with higher contributions from Africa and Central Europe, Asia Pacific and Middle East and Verizon Wireless, partially offset additional costs resulting from Verizon Wireless’ IPhone launch and currency fluctuations.
Results by Segment
Europe: Revenues for the European segment decreased 2.5% year over year (down 0.6% on organic basis) to £32 billion ($49.8 billion) on unfavorable foreign exchange rate fluctuation. Organic Service revenue in Europe declined 0.4%.
Decreases across Southern European due to continued market and regulatory pressures as well as difficult economic conditions were responsible for the year’s decline, which, however, decelerated from 3.8% in the prior year.
Lesser decline in fiscal 2011 can be attributed to strong growth in Northern Europe (Germany, the UK and the Netherlands). Growth in data revenue was also strong but partially mitigated by voice price declines and reduced mobile termination rates (MTRs).
Africa & Asia Pacific & Middle East: This segment posted revenues of £13.3 billion ($20.7 billion), up 20.8% year over year on favorable exchange rates and the full consolidation of Vodacom. Organically, service revenue grew 9.5% despite negative impacts from reduced MTRs and economic upheavals.
The growth was primarily powered by strong results in India on an expanded mobile customer base and pricing gains, continued growth from Vodacom, and the in other regions, except Egypt where results were deeply affected by the socio-political unrest during the end of the year.
Subscriber Trends
During the full year, Vodafone registered roughly 12.9 million net new mobile connections across its operations, bringing the total subscriber base to 371 million (78.6% represented by prepaid). India continued to be a key driver of subscriber growth with net addition of 10.3 million customers in fiscal 2011, contributing 61% of total net addition in the Africa, Asia Pacific & Middle East segment.
In Europe, the company registered a net decrease of 0.17 million subscribers, bringing the region’s total customer base to 147.4 million at the end of March 2011. Africa, Middle East & Asia Pacific added 13.1 million customers taking the total fiscal subscription to 220.1 million.
Liquidity
Vodafone’s net debt reduced by 10.4% year over year to £30 billion ($46.7 billion) at the end of fiscal 2011. The company generated free cash flow of £7.1 billion ($11 billion), down 2.7% year over year.
Capital expenditure remained flat year over year at £6.2 billion ($9.6 billion) due to lowered investments in India. Vodafone also invested £2.9 billion ($4.4 billion) in licenses and spectrum including £1.7 billion ($2.6 billion) in India and £1.2 billion ($1.8 billion) in Germany.
Guidance
For fiscal 2012, adjusted operating profit is expected in the range of £11.0 billion to £11.8 billion, reflecting a loss of £0.5 billion in profits from SFR (Vodafone agreed to sell its 44% stake in the French joint venture, SFR to Vivendi for €7.95 billion or $11.3 billion, which is expected to be completed by the end of June 2011).
Free cash flow is expected in the range of £6.0 billion to £6.5 billion, assuming continued strong cash generation, to be offset by the reduction of £0.3 billion in dividends from SFR and China Mobile (CHL) in fiscal 2012, and more limited working capital improvements going forward. Capital expenditure is expected to be similar to last year, assuming a stable currency value.
EBITDA margin is expected to continue to decline at a lower rate compared to fiscal 2011 as a result of declining revenue in Southern Europe.
For the 2012 financial year, the company assumes foreign exchange rates of £1:€1.15 and £1: $1.60.
Outlook
Vodafone remains well positioned for a strong performance in fiscal 2012 on increased market share gains in the emerging markets coupled with successful smartphone and data packages. Vodafone continues to invest in its European network in order to meet the rising demand for smartphones with different tiered pricing plans.
The company remains focused on key data and emerging markets along with acceleration of investment in network quality and the development of new services. Additionally, the company is also focused on improving shareholder returns through attractive dividend payouts, supported by a healthy free cash flow.
However, the company faces a challenging European economic environment, particularly in Southern Europe and expects reduced MTRs to remain detrimental for revenue generation in the near term. Further, deteriorating margins, aggressive price competition in India and the company’s over-reliance on cost cutting to boost operating results as well as regulatory pressure and stiff competition keep us on the sidelines.
Thus, we maintain our long-term Neutral recommendation on Vodafone. However, the stock currently holds a short -term (1-3 months) Zacks #4 (Sell) Rank.
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