Vodafone reported a net loss of EUR 7.8 billion for its fiscal first half to September, after a loss on the merger of its Indian operations with Idea Cellular and impairment charges on operations in Spain and Romania. Group revenue declined by 5.5 percent to EUR 21.8 billion, hurt by forex and accounting effects and tougher competition in Spain and Italy. The new CEO Nick Read presented his strategy to return the company to growth, including cost efficiencies, convergence and a possible spin-off of tower assets in Europe.
On an organic basis, using the previous accounting standards, Vodafone said service revenue still grew 0.8 percent in the first half, including a slowdown to 0.5 percent in Q2 from 1.1 percent growth in Q1. Growth was driven by market share gains in Europe Consumer fixed, strong mobile data demand and customer growth in emerging markets, as well as continued momentum in Vodafone Business. These offset increased competitive pressures in Italy and Spain, and the drag from lower wholesale revenue.
Organic adjusted EBITDA grew 2.9 percent excluding handset financing and settlements. This reflected growth across the majority of markets, with the exception of Italy and Spain, and was supported by operating cost cuts in Europe and group functions, offset by inflationary pressures in the AMAP region. On a reported basis, adjusted EBITDA fell by EUR 0.5 billion to EUR 6.9 billion, hurt by foreign exchange headwinds, a lower benefit from handset financing in the UK and a regulatory settlement in the UK in the prior year.
Higher cash flow guidance, flat dividend
Vodafone narrowed its guidance for growth in organic adjusted EBITDA in the full year to 3 percent, from a previous range of 1-5 percent. The company also raised its forecast for free cash flow excluding spectrum to EUR 5.4 billion from at least EUR 5.2 billion. Free cash flow in the first half fell to EUR 0.9 billion from EUR 1.3 billion a year earlier, excluding spectrum, due mainly to the lower EBITDA. Capex declined to EUR 3.1 billion or 13.5 percent of revenue.
The company maintained its interim dividend at 4.84 cents per share and said it expects a stable pay-out over the full year as well. It will consider raising the dividend again once its leverage falls to the lower end of the revised target range of 2.5x-3.0x EBITDA. Net debt in the first half was up 6.4 percent to EUR 32.1 billion.
The new CEO and former CFO Nick Read, who took over in October, presented the group's strategy for growing revenues and free cash flow going forward. The focus remains on building leading fixed and mobile networks to drive an excellent customer experience, while also reducing operating costs. Targeted areas for growth include raising revenue per customer and reducing churn in Europe through the continued expansion in fixed and converged services and further expansion of the customer base and penetration of data and mobile money services in emerging markets.
In the September quarter, Vodafone added another 448,000 fixed customers, for a total 16.715 million. Converged customers, taking both fixed and mobile, grew by a slower 110,000 to just over 5 million. The mobile customer base was up by nearly 1 million in the same period to 275.834 million, as growth of 1.8 million customers in the AMAP region offset a loss of 0.8 million in Europe.
The enterprise business, which accounted for nearly 30 percent of revenue in the first half, will also be a key source of growth, focused on cross-selling fixed, IoT and cloud services to mobile customers. The unit is being renamed Vodafone Business to increase brand recognition. In the first half, business service revenue was up 1 percent on an organic basis, as 3.9 percent growth in fixed offset a 0.3 percent drop in mobile.
Radical simplification
On the cost side, the group said it plans a "radically simpler" organisation and acceleration of its digitisation strategy, both within the organisation and in customer channels. In the coming quarters, the operator will roll out new simplified pricing models across markets and proactively phase out complex legacy pricing structures. Lower complexity will allow both significant savings in IT costs and greater commercial agility, Vodafone expects. It's also introducing new 'digital only' products, starting with Vodafone Bit in Spain, which will have lower commissions and operating costs.
The changes above, along with the ongoing ‘Fit for Growth’ programme and zero based budgeting efforts, are expected to lead to another EUR 1.2 billion in cost savings at the European operations in the next two years. In the AMAP region, operating expenses are expected to continue to grow at less than local inflation levels, supporting margins.
Better asset utilisation
The new CEO said he also wants to improve utilisation of the group’s assets, as part of a focus on improving returns on capital. This may include more in-market consolidation, like the pending Liberty Global deal, and additional 'capital-smart' partnerships, such as the fibre cooperations in the UK and Italy. Vodafone said it would also look at partnerships in mobile, as long as they don't affect its service differentiation.
In addition, the company confirmed plans to create a new tower company for its European assets. The internal 'virtual' company will have its own management focused on adding new tenacies and reducing operating costs. Due diligence is also underway to look at whether a sale or new investors are possible.
