International telecom titan Vodafone Group Plc (VOD) has announced key performance indicators for the third quarter of fiscal 2010. In its interim management statement for the quarter, the world’s largest wireless carrier by sales reported consolidated revenues of £11.5 billion (US$18.8 billion), representing 10.3% year-over-year growth.
Healthy contribution from the Asia-Pacific and Middle East operations contributed to the revenue growth. Vodafone did not report earnings in its quarterly filing.
Service, Data & Fixed-line Revenues
Group service revenue (93% of total sales) increased 11% year over year on an organic basis to £10.7 billion (US$17.5 billion). Excluding the impacts of exchange rate swings and mergers/acquisitions (organic basis), group service revenue declined 1.2% year over year, an improvement from a 3% decline registered in the previous quarter.
Consolidated data revenue exceeded £1 billion (US$1.6 billion), up 17.7% year-over-year, boosted by expanded market penetration of data-heavy smartphones across Europe. Revenue from fixed-line services increased 10% to £862 million (US$1.4 billion) driven by healthy broadband subscriber accretion. Vodafone now has more than 5 million broadband subscribers in Europe.
Results by Segment
Europe: Trends Improving
Revenues for the European segment increased 1.6% year-over-year (down 4.3% on organic basis) to £7.7 billion (US$12.6 billion). Service revenue in Europe declined 3.2% organically as growth in Italy and Netherlands continues to be more than offset by decreases across Spain, Germany and the UK, impacted by regulatory pricing pressure and intense competition. However, trends improved in Germany and the UK vis-à-vis the previous quarter as reflected by lower declines in service revenues.
Decline in voice revenue continues to offset growth in data. Revenue in Germany and the UK remains under pressure due to mobile termination rate (inter-operator fees) cuts.
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 Telefonica’s (TEF) O2 UK, Deutsche Telekom (DT) and France Telecom (FTE) for market share. Moreover, competition is set to intensify as Deutsche Telekom and France Telecom combine their UK units (expected in mid-2010), which will create the largest mobile carrier in the region.
Africa & Central Europe: Vodacom is Key
This segment posted revenues of £2.2 billion (US$3.6 billion), up 56.7% 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 0.5% as consistent growth at Vodacom, improved performance in Turkey and increase in subscriber count were more than offset by declines in Central Europe. Service revenue at Vodacom increased 5.5% on an organic basis as a result of healthy subscriber accretion and solid data revenue growth.
Asia Pacific & Middle East: India Remains the Driving Force
The Asia Pacific & Middle East segment continues to perform in line with expectations. Revenue surged 9.7% year-over-year (8.8% organically) to £1.7 billion (US$2.8 billion), driven by continued strong growth in India, the single biggest contributor to organic revenue growth. Service revenue increased 10.4% year-over-year driven by strong subscriber and data revenue growth. Service revenue in India increased 13.8% organically boosted by a roughly 51% growth in wireless customer base amid intense voice price competition.
Subscriber Trends: Europe Shows Improvement
During the quarter, Vodafone registered roughly 10.3 million net new mobile connections across its operations, bringing the total subscriber base to 333 million (83.8% represented by prepaid). India continues to be a key driver of subscriber growth with a net addition of 8.6 million customers, representing 72% of total net additions in the Asia Pacific & Middle East segment.
In Europe, the company registered a net addition of 1.5 million subscribers during the quarter. This compares favorably with a net loss of 262,000 customers in the first-half of fiscal 2010. Verizon’s (VZ) mobile unit, Verizon Wireless, in which Vodafone holds a 45% stake, posted a net addition of 965,000 customers.
Cash Flow & CAPEX
Vodafone continues to invest in Europe to support network infrastructure quality and data growth. Capital expenditure (CAPEX) for the quarter was £1.3 billion (US$2.1 billion), flat year-over-year. Free cash flow increased 15.6% year-over-year to £1.8 billion (US$2.9 billion), driven by cost savings.
Outlook Appears More Favorable
Management has lifted its guidance for fiscal 2010 with adjusted operating profit now projected in the range of £11.4 billion to £11.8 billion (US$18.6 billion to US$19.3 billion) compared to £11.0 billion to £11.8 billion (US$18 billion to US$19.3 billion) per earlier forecast. Annual free cash flow guidance has been raised to between £6.5 billion and £7.0 billion (US$10.6 billion to US$11.4 billion) from £6.0 billion and £6.5 billion (US$9.8 billion to US$10.6 billion).
The upbeat guidance reflects ongoing cost-cutting initiatives, healthy growth across emerging markets and improving trends in Europe. The current Zacks Consensus Estimate for fiscal 2010 revenue and EPS are US$73.7 billion and US$2.33, respectively.
Vodafone is aggressively pursuing its cost-reduction program that includes workforce reduction in Europe. The company has increased its annual savings target to £2 billion (US$3.2 billion) by 2012 from £1 billion (US$1.6 billion) as per earlier expectation. Roughly 50% of the total savings are expected to be realized in 2011.
Moreover, Vodafone continues to accelerate its 3G wireless service deployments and expand network availability across Asia, Eastern Europe and Africa . The company’s HSDPA technology-based 3G mobile broadband network offers network speeds of 7.2 megabits per second (Mbps) across Europe . Efforts are underway to upgrade the existing 3G network footprint to the HSPA+ standard, which will offer throughput of up to 42 Mbps.
Vodafone upgraded its 3G network in the UK to offer peak download speeds of 14.4 Mbps. Leveraging this advancement, the carrier launched Apple’s (AAPL) iPhone in the UK in January 2010, sold a record 50,000 units on the first day.
iPhone has placed Vodafone on a level playing field with its two major rivals O2 and Orange UK. What’s more, Vodafone beat its UK peers to clinch the rights to market Google’s (GOOG) Nexus One in the UK. Moreover, the carrier recently rebranded and drastically cut the price of its femtocell (mini base station) product in an effort to boost customer adoption of its 3G services.
We believe that 3G wireless services coupled with iPhone will foster revenue growth per subscriber in the UK. Moreover, improving business trends in the key European markets and opportunities for sustainable growth across emerging markets are also encouraging.
However, we remain on the sidelines as we are concerned about the regulatory and competitive factors, downside pressure on margins and the company’s over-reliance on cost-cutting to boost operating results. This is reflected in our Neutral recommendation on the stock.
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