Romania leads in cash flow generation among Vodafone's smaller markets

Friday 19 May 2017 | 15:03 CET | Background
Vodafone reported on the Q4 and full year 2017 results. Based on the financials of the larger entities and a number of assumptions we have been able to piece together the results of the smaller entities. We have done so strictly on a quarterly basis. As we shall see below, Romania, Ireland and the Czech Republic lead the six smallest countries in terms of free cash flow generation. Hungary follows at a distance, whereas Albania and Malta unsurprisingly contribute very little.

The Vodafone Group reports revenues, EBITDA and capex semi-annually, while service revenues and subscribers are reported quarterly. On the six smallest countries, mentioned above, reporting is limited and mostly taken as a whole. Subscribers are disclosed for all markets, but service revenues for Ireland and Romania only, and ARPU just for Romania.


We have followed a number of straightforward methods to arrive at full quarterly estimates on all indicators and all of Europe's 13 markets. The basis for our calculations are the reported numbers, the Romanian ARPU, the Irish EBITDA margin and GDP numbers. This approach forgoes nuances at the local level in for instance capex, but it does provide a sense of the size of these countries and the contributions they make to the Vodafone Group.

Combined: operating leverage

The main results for Q4 (i.e. the March quarter) are in the table below. The combined revenues of the six countries were up marginally to EUR 732 million (+0.1%). Service revenues rose 2.0 percent to EUR 655 million. EBITDA came in at EUR 200 million (+2.5%). The EBITDA margin was slightly up from last year to 27.3 percent. The operating result (EBIT) rose 21 percent to EUR 51.9 million.

The first thing we conclude from these yoy growth numbers is that growth increases as we go down in the profit and loss statement. This is witness to operating leverage for the group of the six smallest markets.

The combined capex was EUR 127 million (-9.0%), resulting in rising free cash flow (EBITDA minus capex). FCF was a total of EUR 73 million (+32%), or 10.0 percent of revenues (last year: 7.6%).

   Revenues Service revenues EBITDA Capex  Free cash flow
 Ireland  263  235  66  46  20
 Romania  196  175  56  34  22
 CR  159  142  45  28  18
 Hungary  97  87  28  17  11
 Albania  9  8  3  2  1
 Malta  8  8  2  1  1

Leaders: CR in growth, Romania in FCF contribution

The Czech Republic (CR) was the main contributor to growth, seeing its revenues rising 5.0 percent. Ireland was the weakest, with revenues down 3.1 percent. CR also was the strongest in service revenue growth (+7.1%) and Ireland the weakest (-1.3%).

Operating costs (opex) are reflected in the EBITDA and the EBITDA margin. Our calculations show that Ireland (+5.8% to EUR 66m) and Romania (-2.3% to EUR 56 m) had the largest contributions to EBITDA. We assume slightly larger profitability at this level for Romania (28.6% margin) than for Ireland (25.1%).

We further assume that these two countries account for the largest portions of the combined capex, with EUR 46 million for Ireland and EUR 34 million for Romania. From this follows that Romania provided the Group with EUR 22 million (+14%) in free cash flow, followed by Ireland with EUR 20 million (almost doubling) and CR with EUR 18 million (+21%).

Smallest markets on par with others, but not Germany and Italy

So how do the small markets compare to the rest of Vodafone's European portfolio? The combined revenues are much less than those generated in the largest countries (Germany roughly EUR 2.5b; Italy, UK and Spain roughly EUR 1.5b). The UK clearly has the worst growth profile (revenues down 17%). Portugal scored best (+2.1%) and the other countries' revenues were essentially flat.

The EBITDA margins are significantly higher in Italy (36.3%) and Germany (34.3%), followed by Portugal (32.0%). The UK lags with 16.1 percent, but the other countries are in the same range (high 20s).

Germany is the outperformer currently in terms of free cash flow generation, providing the group with EUR 518 million, followed by Italy with EUR 316 million.The six smallest markets obvioulsy have quite small contributions, but at the moment they outperform the UK's EUR 13 million in absolute terms.

Taking free cash flow as a portion of the revenues as a measure of profitability reveals that Germany and Italy (around 20%) far outperform all other markets (around 10%), with the UK a current outlier (0.8%). This sends the message that size is of limited importance, but also that markets the size of Italy and Germany are required to generate meaningful free cash flow. In this respect, the mobile market does not quite resemble the Western European market of incumbents, where even the smaller ones are almost equally profitable as the bigger ones.

One must however keep in mind that other factors, noy just size, influence profitability as well, such as the number of MNOs (reduced to three in both Germany and Italy). And even more importantly: Vodafone has launched fixed-line services in several countries, but not all: Germany, Italy, Spain, Portugal, Ireland (note that the Netherlands are no longer part of the Group from Q1 2017, i.e. the Group's Q4).

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