Operator experienced third quarter decline in revenue throughout Europe, although emerging markets continue to grow
Vodafone has announced challenging results for the third quarter ended 31 December 2012, thanks to declining revenues across Europe.
Vodafone has stated that Group service revenue declined 2.6%, or 0.4% excluding mobile termination rate (MTR) cuts, in the quarter.
The company experienced decline in revenue throughout Europe, including Northern and Central Europe service revenue with Germany down 0.2% and the UK down 5.2%. Meanwhile, the company was challenged in Southern Europe where revenues for Italy dropped by 13.8% and Spain, which fell by 11.3%.
Emerging markets remained a positive growth area for Vodafone in the quarter, with India up 9.0%, Vodacom up 1.9%, and Turkey up 18.4%.
Vittorio Colao, Vodafone chief executive, stated: 'Our results continue to reflect very difficult market conditions in Europe. We are addressing this through firm actions on cost efficiency, and continuing to invest in areas of growth potential.'
Yet Verizon Wireless service revenue grew by 8.7% driven by strong customer additions, and the company's net debt reduced to £23.3 billion after receipt of a £2.4 billion Verizon Wireless dividend.
Group data revenue grew by 12.8%, reflecting an increase in European smartphone penetration to 33.4%.
Following the announcement of Vodafone's results, Emeka Obiodu, principal analyst at Ovum, commented: 'Vodafone's results reflect the challenging economic environment in its core market. Sadly, this is to be expected. Ovum's research has shown that telecoms is a lagging indicator to the economy. Accordingly, given Europe's economic woes in 2012, we expect telcos that rely on Europe for the majority of their revenues to struggle. Customers feel the pinch in their pockets before they reduce their telecoms spend.
'The challenge for Vodafone and other European operators is to stabilise their performance and ensure that their share of the customer's wallet holds firm,' Obiodu added. 'For Vodafone in particular, Ovum warned in 2009 that its emerging market operations must not be relied on to perpetually offset poor performance at home. This has proved to be a prescient warning. Growth in its emerging markets operations has slowed and Vodafone is now relying on Verizon Wireless. It is to Vodafone's credit that its management fended off pressure to sell the Verizon stake in the past.'
Yet Obiodu stated there is still hope for Vodafone. 'Opportunities exist for telcos to play a bigger role in the 'connected future'. Better pricing design can also unlock additional value, and telcos should look to become active enablers of the digital society. In doing this, Vodafone must get the balance right between investment and profitability. And this is where European regulatory authorities should help by not imposing huge burdens on them.'
Vodafone launched LTE services in Italy, South Africa, Greece and Romania, making LTE now available in six markets.
Colao added: 'We continue to make progress in our Vodafone 2015 strategy, with good revenue growth in data and emerging markets, the launch of LTE services in another four markets and the acquisition of new spectrum.'
He continued: 'Vodafone Red, our new strategic pricing approach in Europe, has been launched in five markets with positive early take up, and to drive growth in enterprise we have created a new enterprise business unit and accelerated our integration plans for Cable & Wireless Worldwide.'
Free cash flow of £1.2 billion in the quarter was £0.3 billion lower year on year due to adverse movements in foreign exchange rates and the impact of the inclusion of Cable & Wireless. Cumulative free cash flow was £3.4 billion, a total of £0.7 billion less than the previous year, reflecting adverse foreign exchange rate movements and the cessation of dividends from SFR following the disposal of Vodafone's stake in the last financial year.
The Group is making progress on cost saving initiatives towards its target of a £300 million net reduction in European operating costs in the 2014 financial year, with the commencement of its network sharing joint venture with Telefonica UK and the ongoing development of its shared services strategy, in addition to a number of other efficiency programmes.
For 2013, adjusted operating profit is still expected to be in the upper half of the range of £11.1 billion to £11.9 billion. Despite the weaker revenue performance, Vodafone expects the full year Group EBITDA margin decline to continue improving year on year, excluding the impact of M&A and restructuring costs, as the Group increases its focus on value share and continues to progress on cost savings programmes.