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European Woes Hit Vodafone 1H

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British mobile phone behemoth Vodafone Group Plc (VOD - Free Report) declared adjusted earnings of £0.0786 per share (or earnings per ADS of 12 cents) for the first half of fiscal 2013. The carrier reported half-yearly consolidated revenue of £21.78 billion ($34.5 billion), representing a year-over-year and organic drop of 7.4% and 0.2%, respectively.

The lackluster performance in the first half was due to the challenging conditions in southern Europe that intensified following threats of recession due to the sovereign debt crisis.

Group service revenue (92.7% of total revenue) grew 0.4% year over year on an organic basis to £20.2 billion ($32 billion). On reported basis, group service revenue declined 7.9% year over year.

Consolidated data revenue was £3.24 billion ($5.13 billion), up 5.7% year over year, boosted by strong smartphone and mobile Internet sales. Messaging revenue fell 10.7% to £2.4 billion ($3.8 billion) from the year-ago quarter and voice revenue dropped 14.1% to £11.5 billion ($18.2 billion).

Fixed-line service revenue grew 10% on an organic basis to £1.98 billion ($3.13 billion) buoyed by healthy broadband subscriber accretion. Other service revenue was £1.1 billion ($1.74 billion) in the first half, up 7.1% year over year.

Segment Results


Revenues for the European segment fell 19% year over year and 7.1% on an organic basis to £15.1 billion ($23.9 billion). Service revenue in Europe also grew 8.7% year over year and 1.6% organically to £14.1 billion ($22.3 billion).  

Africa, Middle East and Asia Pacific

The Africa, Middle East and Asia Pacific revenue fell 4.6% year over year, but climbed 5.6% organically to £6.6 billion ($10.4 billion). Service revenue decreased 5.1% year over year, but on an organic basis it rose 5.2%.

Subscriber Trends

During the reported period, Vodafone reached total subscriber base of 407.4 million (80.1% represented by prepaid). In Europe, the company lost 0.9 million subscribers, bringing the region’s total customer base to 146.5 million at the end of September 2012. Africa, Middle East & Asia Pacific added 40.8 million customers, taking the total subscription to 260.9 million in the reported period.


Vodafone reported liquidity of £26.2 billion in the first half of 2012 compared with £28.4 billion in the first half of fiscal 2011.

The company generated free cash flow of £2.2 billion, down 16.7% year over year during the reported period. Capital expenditure was £2.52 billion, down 3.8% from the year-ago quarter.


Vodafone reiterated its fiscal 2013 guidance. Management expects consolidated EBITDA margin to decline less. Adjusted operating profit is expected in the range of £11.1 billion to £11.9 billion.

Free cash flow is expected to remain stable in the range of £5.3 billion to £5.8 billion, excluding any dividend received from Verizon Wireless.

Our Take

Vodafone continues to expand in emerging markets such as Eastern Europe, Asia, India and Africa as well as grow in enterprise segments due to successful smartphone and data services adoption. However, these expansions might not bear fruit this year due to the growing concerns about economic conditions, particularly in Southern Europe.

A weak European economy, harsh regulatory backdrop and stiff competition from larger rivals like Verizon Communications Inc. (VZ - Free Report) and AT&T Inc. (T - Free Report) would continue to dampen service revenue and subscriber count. Further, reductions in mobile termination rates would also pose a major threat to the stock.

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