Vodafone NL Q4: mobile weak, fixed strong but soon to disappear

Friday 20 May 2016 | 12:04 CET | Background

Vodafone Netherlands was the weakest operation in the Vodafone group during the operator's fiscal fourth quarter. Retail mobile was weak, and while the fixed activities provided some growth, this may soon be swallowed up in the proposed merger with Ziggo. The latter is also not growing on the fixed market. Nevertheless, Vodafone shows good cost control and margins. The big question is what the company plans to do with its Vodafone Thuis fixed customers: migrate them to Ziggo or sell them to another ISP?

The organic growth in operating revenues (service revenue, including fixed, mobile, wholesale, M2M etc) was -1.3 percent at Vodafone Netherlands during the quarter. This while traditionally weak markets like Germany grew by 1.6 percent and Turkey reached growth of 22 percent. Vodafone only reports profits for the half year, so we made estimates of the quarterly results. 

   Q4 2014/15 Q1 2015/16  Q2 2015/16  Q3 2015/16  Q4 2015/16 
 Revenue (EUR mln)  475 474 489 468 457
 Service revenue ('operating') (EUR mln)  434 435 448 439 428
 Handsets & accessories (EUR mln) 41 39 40  30 29
 EBITDA (EUR mln) 115 119 123 113 117
 Margin (%) 32.6 34.9 34.9 33.3 33.3
 Capex (EUR mln) 74 53 55 76 80
 Free cash flow (EBITDA - capex) (EUR mln) 41 66 68 36 38

Shutting down 3G

Vodafone's aim for its country operations is to show 'operational leverage' within three years, i.e. EBITDA growing faster than revenue. This is a way for the company to show it's efficient and benefiting from economies of scale. Under the motto 'Fit for Growth', Vodafone is reducing costs in order to push margins up. Vodafone Netherlands is largely following the plan, as shown by its growing EBITDA margin. This reached 33.3 percent in the latest quarter, up from 32.6 percent a year ago. Given the extra costs for launching its fixed actitivities, this is a positive result. The cost cutting will continue, with projects planned in the period to 2020 such as virtualisation and shutting down the 3G network once 5G is available.

Mobile weakness

Mobile data, business customers and fixed services are supposed to drive growth at Vodafone. In the Netherlands, the focus is on the fixed market. The mobile business had a weak quarter, across almost all indicators:

  • Operating revenue fell 1.3 percent, the weakest performance in seven quarters, due a drop in retail mobile (-6.2%). It was further flattered by a change in accounting. The growth in fixed could not fully compensate. Postpaid ARPU fell 6.7 percent.
  • Vodafone lost postpaid subscribers for a second quarter in a row (-0.5%). The drop in prepaid is flattening out and stood at 6.8 percent. The 77-23 split in postpaid versus prepaid may start to stabilise at this level.
  • Voice traffic increased slightly (+1.4%), while SMS was down sharply (-23%), and data traffic continued to grow (+37%). A concern is the slowdown in growth in minutes and data. Data traffic showed a peak in the September quarter last year and has now fallen on a sequential basis for two quarters in a row. 
  • Handset revenues fell by 31 percent.
   Q4 2014/15 Q1 2015/16 Q2 2015/16 Q3 2015/16 Q4 2015/16
Retail mobile customers (x1,000) 5,160  5,173 5,132 5,064 5,030
Postpaid customers (x1,000) 3,880 3,889 3,876 3,865 3,860
ARPU postpaid (EUR) 32.7 32.1 33.2 32.1 30.5
Prepaid (% of total customers) 24.8 24.8 24.5 23.7 23.3
4G users (mln) 1.2 1.3 1.4 1.5 2.0
Smartphone penetration (%) 63.1 63.8 68.2 69.9  69.9
Voice traffic (bln minutes)  2.802 2.866 2.747 2.776 2.841
SMS traffic (mln) 346  345  330  270 268 
Data traffic (bln MB) 6.112 7.285 9.289 8.441 8.390
Consumer fixed customers (x1,000) 49 61 73 89 106



The end of Vodafone Thuis

Mobile data and 'virtual' fixed services are providing the growth at Vodafone NL. However, the proposed merger with Ziggo raises some uncomfortable questions. The customer base being built up on KPN's network (FTTH and DSL) will disappear again from 2017, while Ziggo is not showing any growth. We assume Vodafone will want to serve its customers 'on-net' in order to maximise its margins, so they will be on the Ziggo network. At its current growth rate, that means around 150,000 Vodafone Thuis will need to move to Ziggo. The fibre customers especially may have a problem with this, as many have likely knowingly chosen fibre over cable. Vodafone also faces the question of how much to continue to invest in this. 

An alternative is selling the fixed customer base. T-Mobile, Tele2, Online and CIF/Caiway all could be interested in gaining the increased scale. This would also please the regulator, and if Vodafone is sensible too, it will recognise that it also benefits from healthy competition. 

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