Vodafone Reports Flat EBITDA for 2009 Financial Year, Hit by Indian Licence Costs

Vodafone has announced its earnings (EBITDA) for the financial year ending 31 March has risen 1.7% year-on-year (y/y) to £14.7 billion (US$21.2 billion), roughly in line with analyst expectations, as the global operator was hit by an impairment related to the acquisition of its licences in India.

Vodafone, the world number-one mobile operator by revenue, also announced revenue for the 2009 financial year fell 2.3% y/y to £44.5 billion (excluding benefits from currency exchange rates and acquisitions). Net profit in the year jumped to £8.62 billion driven by cost cutting and revenue growth, compared to £3.08 billion in the 2008 financial year, when the operator was hit by impairment charges on the write-down of its units in Spain, Turkey, and Ghana. The group's bottom line was also boosted by a sharp fall in income tax from £1.1 billion to £56 million, and a reduction in finance costs to about £900 million.

The U.K.-based group, which has 341 million subscribers globally including its share of those from affiliates, also reported free cash flow rose 27% during the year to £7.2 billion, above previous forecasts of cash flow of between £6.5 billion and £7 billion.

Vodafone has now forecast annual dividend growth of around 7% for the next three years, and said it expected adjusted operating profit in the current financial year to be between £11.2 billion and £12 billion, compared to £11.5 billion in the 2009 year ending 31 March.

Outlook and Implications

• Vodafone Stays Strong, Predicts Further Growth: Vodafone chief executive Vittorio Colao said the group's financial results had exceeded its forecasts on all measures, saying: "We are creating a stronger Vodafone which is positioned to return to revenue growth during the 2011 financial year, as economic recovery should benefit our key markets." Vodafone said its £1 billion cost-savings programme was delivered a year ahead of schedule and a new two-year, £1-billion cost-savings programme would begin. The group also revealed it is now generating a third of its revenue from services other than mobile voice communications, particularly driven by the explosion in mobile broadband services. Higher spectrum costs and a fierce price war in India have weighed on Vodafone's results, but its performance across most of its emerging markets remained solid due to continued growth and increasing market penetration. In Africa, Vodacom continues to register impressive growth, despite economic pressure due to the economic downturn, as the operator continues to implement its strategy of offering total communications solutions (see Sub-Saharan Africa: 9 November 2009: Vodacom Reports 41.6 mil. African GSM Subscribers). Elsewhere, Vodafone said Verizon Wireless, the U.S. joint venture with Verizon Communications, posted a 6% increase in full-year revenue, as speculation concerning the future of Vodafone's 45% stake in the operator continues (see United States: 29 March 2010: Vodafone Seeks Verizon Dividend—Reports).

• Investment Continues in Europe: Vodafone continues to struggle in its more mature Western European and central European operations, as voice and messaging revenue declined and enterprise revenue fell as business customers continued to make cutbacks. However, Vodafone appears to be becoming an increasingly aggressive investor in its largest European markets. In Italy, Vodafone has teamed up with key alternates Fastweb and Wind to roll out their own fibre fixed-line network build a 2.5-billion-euro (US$3.15 billion) plan last week (see Italy: 6 May 2010: Italian Alternatives Reveal US$3.2-bil. Fibre Network Co-Operation—Report), while in Germany, Vodafone has said that it will employ aggressive tactics—more than in any other market where Vodafone operates—to grow its revenue and market share over the two next financial years (see Germany: 11 May 2010: Vodafone Germany to Focus on Organic Growth, Promises Aggressive Tactics). However, there is some speculation that the burden of investment in emerging markets may push Vodafone to unload some of the smaller assets in Europe—for instance in the Czech Republic or Hungary, where in both it is the third-largest mobile player with limited fixed-line presence. The group has also been fairly ambiguous as regards its plans for Polkomtel, Poland's largest mobile operator in which Vodafone holds a stake of 24.4% (see Poland: 29 April 2010: Polkomtel's Shareholder PGE Picks Advisor for Divestment). Meanwhile, Vodafone has recently stated that network quality will become a key concern, as demand for more data-hungry mobile services such as music streaming and downloads increases—particularly in the cutthroat U.K. market (see United Kingdom: 22 December 2009: Vodafone Says U.K. Network Quality a Priority, Releases iPhone Tariffs).

• Key Growth in India Offsets Impairment Charge: Vodafone has taken an impairment charge of £2.3 billion on its fast-growing Indian unit, after facing new licence costs. However, since its acquisition of Hutchison’s Indian unit, Vodafone has reported robust growth at its Indian unit Vodafone Essar, now the country’s third-largest mobile operator (see India: 8 April 2010: Vodafone Essar Mobile Subscriber Base Surpasses 100 mil.)  However, increasing competition and aggressive tariff cuts resulted from the entry of new players has led to slower subscriber growth and even lower APRU levels. The recent proposal by the Telecom Regulatory Authority of India (TRAI) to increase 2G spectrum fees could bring further financial burdens to Vodafone Essar. The company is now engaged in a fierce bidding war for 3G spectrum. Bids for one set of pan-India 3G spectrum have reached US$3.54 billion after several weeks of ongoing auction. Although 3G licences would give the winner the opportunities to deploy advanced mobile data services and to attract high-end users, high spectrum fees and network roll-out costs will further weigh down operators’ profitability. Elsewhere in Asia, Vodafone has recently merged its Australian unit with that of Hutchison. This should put the combined entity in a better position to compete with the larger rivals Telstra and SingTel-owned Optus in Australia’s mature mobile market.