Vodafone’s First-Half Revenue Hurt by Currencies


Vodafone reported weak first fiscal half revenue due to currency issues. The firm’s reported revenue declined 7.4% year over year as the British pound strengthened against most of the other currencies where it operates. On an organic basis, Vodafone’s revenue increased 0.2%, which is close to analysts 0.8% full-year assumption.

However, the mix was different from our projections. Europe as a whole struggled more than we anticipated. Germany (plus 4.2% in local currency terms) was the only major country that outperformed our expectations, while the U.K. (negative 2.7%), Italy (negative 8.2%), and Spain (negative 13.9%) were all worse.

On the other hand, India (plus 13.4%) and Vodacom (plus 5.9%) both performed better than we anticipated. The debt crisis and corresponding government austerity measures are clearly having a greater impact than we anticipated as customers cut back on their phone usage. While data revenue continues to increase, it is not sufficient to offset the lower voice and texting revenue. As more subscribers move to bundles of services, this pressure will likely continue.

However, in emerging markets, increased data usage is offsetting the slowing subscriber gains as wireless penetration rates increase. This has allowed faster growth to continue longer than we expected. India’s subscriber base growth slowed as we had anticipated and only grew 5.3% from the year-ago period to 152.7 million customers, although the unit did benefit from a 12.4% increase in data revenue. The division now has 32 million active data users. At Vodacom, the subscriber base jumped 21.5%, which is faster than we projected, but we don’t think it is sustainable.

The lower revenue, along with higher costs due to the increased data usage, lowered Vodafone’s EBITDA margin 1 percentage point. However, its associate company, Verizon Wireless, in which it owns 45%, performed very well with service revenue growth of 8%. When Vodafone’s share of Verizon Wireless’ results are added to its EBITDA, the combined total reaches an EBITDA margin of 45.2%– well ahead of our full-year projection of 41.2%.

Verizon Wireless is expected to continue to help offset weakness in Europe. Additionally, on Monday, Verizon Wireless announced it would pay an $8.5 billion dividend to its shareholders. Vodafone’s share is $3.825 billion (GBP 2.4 billion) and the company will use GBP 1.5 billion to buy back its stock. The firm also increased its interim dividend 7.2% to GBP 3.27, in line with its commitment to raise the dividend at least 7% each year through March 2013. With the stock’s recent pullback, it is back in 4-star territory.


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