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Vodafone Group Plc (VOD - Analyst Report) reported its financial results for the six months ended Sep 30, 2013. 

The company reported adjusted earnings per share of 7.85 pence (approximately cents), down 2.6% year over year. The drop was due to lower adjusted operating profit, given the termination of equity accounting for Verizon Wireless of Verizon Communications Inc. (VZ - Analyst Report) beginning Sep 2, 2013.

The company recorded consolidated revenues of £22 billion ($28.5 billion), which was up 1.2% year over year on a reported basis but down 3.2% on an organic basis. Group service revenues (91% of total revenue) increased 0.1% year over year to £20 billion ($26 billion) on a reported basis but decreased 4.2% on an organic basis.

Segment Results

Northern and Central Europe: Revenues increased 5.1% on a reported basis but decreased 3.5% on an organic basis year over year to £10.2 billion ($13.2 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 of mobile in-bundle revenues. Service revenues in this segment were up 4.6% year over year on a reported basis but dropped 3.9% on an organic basis to £9.5 billion ($12.3 billion).

Southern Europe: Revenues of £4.9 billion ($6.4 billion) were down 8.6% on a reported basis and 13.5% year over year. Service revenues decreased 10.1% on reported basis and 14.9% on an organic basis year over year to £4.5 billion ($5.8 billion). The decline was due to reductions in interconnection charges, pricing pressure and macroeconomic weakness that offset the growth in data revenues. Declining revenues across all major markets were also responsible for this slump.

Africa, Middle East & Asia Pacific (AMAP):Revenues from thissegment nudged up 1.2% on a reported basis and 7.0% organically year over year to £6.7 billion ($8.7 billion). Service revenues dipped 0.5% year over year on a reported basis but grew 5.8% on an organic basis to £5.9 billion ($7.7 billion) driven by customer additions, increased usage, solid pricing and robust performances in Vodacom. This was offset by the negative impact of MTR reductions, regulatory pressure and poor market conditions in certain countries. Country wise, India, Qatar, Ghana and Egypt delivered strong performance offsetting service revenue declines in Australia and New Zealand.

Subscriber Trends

During the six-month period under review, Vodafone’s total mobile subscriber base reached 411.5 million (79.8% represented by prepaid). In Europe, the company added 503,000 million subscribers, bringing the region’s total customer base to 142 million at the end of Sep 2013. Africa, the Middle East & Asia Pacific added 2 million customers, taking the total subscription to 216 million.

Liquidity

Vodafone Group generated free cash flow of £1.8 billion ($2.3 billion), down 3.9% year over year. Capital expenditure was £2.3 billion ($3 billion), up 14.3% from the corresponding year-ago period.

Guidance

Vodafone’s fiscal 2013 management expects adjusted operating profit of £5 billion and free cash flow in the range of £4.5–£5.0 billion.

Dividend

Vodafone assumes completion of the Verizon Wireless stake sale by the first quarter of calendar year 2014 and considering this, it expects a 8.0% hike in the final dividend per share. For fiscal 2014, the company expects annual dividend payment of 11 pence, which includes interim dividend payment of 3.53 pence.

Our Analysis

Despite the 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 remained 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, which operates with other European carriers like Telef and Orange (ORAN - Analyst Report), currently has a Zacks Rank #2 (Buy).

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