Vodafone Records Lower Revenues despite Growth in Europe

Vodafone Group plc VOD announced its interim management statement for the first quarter ended Jun 30, 2014, on Jul 25.

The company recorded consolidated revenues of £10.204 billion (approximately $17.2 billion), which were down 6.2% year over year on a reported basis and 4.4% on an organic basis. Group service revenues (91% of total revenue) dropped 6.4% year over year to £9.446 billion (approximately $15.9 billion) on a reported basis and decreased 4.2% on an organic basis, given the impact of a challenging European economy along with rising regulatory and competitive pressures.

As the company witnessed a revenue decline, its share price went down by 22 cents and closed at $34.16 in the last trading session.

Segment Results

Europe: Revenues increased 16.5% on a reported basis but decreased 8.9% on an organic basis year over year to £6.851 billion (approximately $11.5 billion). The organic decline was due to poor economic conditions in some markets, competitive pressure and the impact of MTR cuts, partially offset by growth in mobile in-bundle revenues. Service revenues in this segment were up 17.2% year over year on a reported basis but slipped 7.9% on an organic basis to £6.450 billion (approximately $10.9 billion).

Africa, Middle East & Asia Pacific AMAP: Revenues at this segment declined 10.2% on a reported basis due to unfavorable foreign exchange rate movements but grew 6.1% organically year over year to £3.209 billion (approximately $5.4 billion). Service revenues declined 11.3% on a reported basis but climbed 4.7% organically year over year to £2.9 billion (approximately $4.9 billion), driven by customer additions and favorable pricing as well as increased demand for data. Countries like India, Qatar, Ghana and Turkey as well as Vodacom delivered strong results. This was offset by the negative impact of MTR reductions, regulatory pressure and poor market conditions in certain countries.

Subscriber Trends

During the three-month period under review, Vodafone's total mobile subscriber base reached 435.9 million (80.9% represented by prepaid). In Europe, the company added 33.7 million subscribers, taking the region's total customer base to 125.4 million. Africa, the Middle East & Asia Pacific added 72.2 million customers, with the total subscription reaching 310.5 million.

Liquidity

Vodafone Group generated free cash flow of £0.6 million (approximately $1 billion). Capital expenditure was £1.9 billion (approximately $3.2 billion), up 83.4% year over year due to the initiation of a two-year investment program of £19 billion.

Guidance

The company reaffirmed its financial guidance for 2015.

For fiscal 2015, the company expects EBITDA in the range of £11.4 billion to £11.9 billion, and positive free cash flows. The company also projects a £19 billion capital expenditure program of two years ending March 2016, which will normalize to 13–14% of annualised revenues in the subsequent years.

Our Analysis

Despite strong growth prospects of Vodafone, we are concerned about a decline in service revenues and subscriber count, particularly in the European continent. Continued economic weakness, regulatory pressure, stiff competition, reduction in mobile termination rates (MTRs) and roaming prices proved detrimental to the company's growth. However, Vodafone's strong growth in emerging markets can partially offset challenging market conditions and provide a high-profit margin, given lower infrastructural costs. Further, the company is increasingly making efforts to shift toward more data-centric services as the level of data services in these markets is considerably low, providing opportunities for deeper penetration.

Vodafone currently has a Zacks Rank #4 (Sell).

Other Stocks

Better-ranked stocks in this sector include Shenandoah Telecommunications Co. SHEN,  TIM Participacoes S.A. TSU and TELUS Corporation TU. While Shenandoah and TIM Participacoes sport a Zacks Rank #1 (Strong Buy), TELUS has a Zacks Rank #2 (Buy)

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