During the first half of fiscal year 2010 Vodafone has managed to increase its sales with 9.3 percent. EBITDA rose with 2.4 percent. Cutting the costs has gone quicker than expected, which allows the current cost cutting program of GBP 1 billion to be expanded by another billion. Guidance has been maintained and the free cash flow should end up on the upper side of the indicated range. Still, the share fell nearly five percent in reaction to the figures. How is that possible?
First we should note that the figures are in line with market expectations, so we have to look deeper for the negative reaction on the stock exchange.
A few causes can be pinpointed as a reason for the cautious reaction to the figures. Firstly the figures are flattered by the weak British pound. Autonomous sales declined by 3.0 percent and EBITDA even with 7.9 percent. The EBITDA margin therefore also saw a strong decline (with 2.1 percentage point) to 34.3 percent. Furthermore Vodafone benefitted from low tax payments, with effectively a rate of only 21.5 percent. Taken over the entire fiscal year this should reach around 25 percent.
Vodafone also profits from its cost cutting, both in opex and capex. Management is very adept at this, so a new round of cost savings has been announced. Vodafone can continue on this road for a while, but these are in fact one-time issues. The ratio of capex and sales is alarmingly low in some countries: for example in the Netherlands it is only 6.2 percent. Vodafone aims for 10 percent and so the question arises if they are not investing too little at the moment – solely to maintain the free cash flow. That can endanger the future growth.
A comparison with KPN shows that, this year, KPN is performing better. During the first nine months KPN managed to increase its sales from services in the Netherlands by 10.9 percent, and in Belgium with 5.6 percent. In Germany KPN saw an increase of 1.2 percent, whereas Vodafone saw an autonomous growth of -4.8 percent. When looking at the ratio of capex and sales, KPN has a ratio of 12.8 percent in Germany (Vodafone 8.4%) and one of 11.8 percent in Belgium. This is roughly double of what Vodafone invests in the Netherlands (For the Netherlands KPN does not show separate capex for fixed and mobile.)
So despite the cost cutting, Vodafone’s EBITDA margin continues to decline. This allows KPN to have a higher margin in Germany than Vodafone: 41.9% vs 39.5%.
Another negative aspect is the price pressure. Mobile operators like to point to the effects of regulation concerning the termination and roaming. The operators like to take these effects out of the figures, but seeing that the European Commission constantly pushes for lower tariffs, it becomes questionable if these can be seen as single issues. According to the EC the termination rates should be cut to 1 or 2 cents per minute, and even a complete abolishment (“bill and keep”) cannot be ruled out.
The rise of mobile VoIP adds to the (expected) price pressure. The FCC is making a case not to have this service blocked. In Europe newcomers such as 3UK create price pressure by facilitating mobile VoIP.
India is an example of a country where a newcomer (Tata DoCoMo) is shaking up the establishment and forces prices down. In India Vodafone’s ARPU plummeted in Q2 with 27 percent on an annual basis. In most markets the ARPU is now lower than a few years ago, with the exception of Italy and Turkey. As various auctions are scheduled (not least in the Netherlands), the expected price pressure is causing concern amongst investors. For many years not having a mobile network (like BT) counted as a shortcoming, now the question arises if it isn’t a risk.
