Vodafone's Full-Year Profits Halve, Accelerates Cost Cutting

Vodafone has announced that its annual net profit for the last financial year plunged 54% to

£3.08 billion (US$4.69 billion), down from £6.76 billion in the pervious year (2007-08), as the operator was hit by impairment charges of £5.9 billion chiefly relating to its performance in Spain and Turkey. Vodafone announced that earnings before interest, tax, depreciation and amortisation (EBITDA) in the 12 months to March 2009 increased by 10% to £14.5 billion from £13.2 billion in the previous year, while revenues rose by 16% to £41 billion from £35.5 billion in the 2007/08 financial year, with both figures roughly in line with analyst expectations (although these figures were boosted by a 14% fall in the value of the pound sterling against the euro).

The U.K.-based mobile operator—the largest in the world by revenue—also announced that it would accelerate its cost-cutting plans and bring forward a £1-billion savings programme. It says it now aims to achieve at least 65% of these savings in the current financial year, ahead of earlier targets of 50%. Vodafone Chief Executive Officer Vittorio Colao said in a statement, "Our £1-billion cost-reduction programme is ahead of plan and we continue to explore further ways to reduce cost. We maintain our tight focus on capital discipline and returns to shareholders."

Vodafone also announced it added 7 million new customers in the first quarter of 2009, bringing its global total to 303 million at the end of March.

Outlook and Implications

• Vodafone Upbeat after Damage Limitation Pays Off: Vodafone seems largely pleased with its financial performance, with Colao saying, "These results demonstrate the impact of the early actions we took to address the current economic conditions and highlight the benefits of our geographic diversity." The operator began its cost-cutting programme in November 2008, announcing plans to make £1-billion savings before 2012 to maintain profit and boost free cash-flow (see World: 11 November 2008: Vodafone Looks to Cut £1-bil. Costs as Net Profit Falls 35% and United Kingdom: 25 February 2009: Vodafone Confirms 500 U.K. Job Losses as Cost-Cutting Bites). Since then, the global giant, which now boasts over 300 million customers worldwide (second only to China Mobile), has cut jobs, restructured and trimmed investment plans. However, while Vodafone has striven to minimise the impact of the global recession on its business, falling revenues across its European markets have offset impressive growth elsewhere.

• The European Recession Begins to Bite: Colao cites a 1.7% service revenue decline across its stagnant European markets for the profit drop, stating, “In our more mature European and Central European operations, voice and messaging revenue has declined, primarily driven by lower growth in usage and continued double-digit price declines." In Vodafone's home U.K. market, revenues fell 1.1%, while in Germany—the operator's largest market—they dropped 2.5%. In Spain, service revenue dropped by nearly 5% over the year, with an 8.6% slump in the last quarter alone, where although Vodafone has managed to steal market share from the incumbent, Telefónica, an aggressive price war is having an impact on its ARPU as it attempts to undercut its rivals (see Spain: 13 April 2009: Vodafone Spain Keeps Its Lead in Mobile Net Additions in December-Februaryand Spain: 5 May 2009: Telefónica to Expand Promotion for Unemployed in Spain). Vodafone also took a significant impairment charge from its disappointing Turkish unit, where it has recently cut jobs as competition increases from the introduction of MNP and future 3G services (see Turkey: 6 March 2009: Vodafone Turkey Axe 260 Jobs as Part of Reorganisation). However, the operator has seen revenue advance in fresh markets such as India and Africa, and says it plans to continue investment in “revenue growth opportunities” in emerging regions.

• Vodafone Sees Fair Outlook: Vodafone expects its adjusted operating profit in the current financial year to be in the range of £11-11.8 billion, while predicting that total EBITDA will decline at a “slightly” slower rate. However, the operator was able to state that it expects capex to be at similar levels to the 2009 financial year, while free cash-flow should grow to around £6-6.5 billion as savings from cost-cutting filter through. Although the recent flurry of EU regulation will further hit revenues at Vodafone's European operations, the operator admits it has already seen roaming revenue fall due to lower business and leisure travel, and has reacted positively to roaming regulation by cutting charges for U.K. customers over the summer (see Europe: 8 May 2009: EU Plans 70% Cut in Mobile Termination Rates and United Kingdom: 14 May 2009: Vodafone UK Unit to Scrap Roaming Charges for 3 Summer Months). As the operator seeks to boost its data service use, chiefly through mobile broadband, it has recently moved towards developing an applications store, mimicking Apple and Nokia's success in this market (see World: 13 May 2009: Vodafone Streamlines Application Development with Global Initiative). The operator is also among the frontrunners in Europe to move towards launching 4G LTE services, which will enable it to provide much improved broadband and data offerings (see World: 26 September 2008: NSN and Vodafone Germany Test LTE Platform). Recent figures show that Vodafone has managed to raise its non-voice revenue share to around 25% in the United Kingdom—an impressive figure, but still well below key rival O2, which is claiming a data-service revenue share of near 35%, aided by the Telefónica unit's monopoly on the iPhone. In its established markets, Vodafone has shown that it sees mobile broadband and data use as the way forward as traditional revenues decline, and IHS Global Insight expects to see significant investment in these services over the next year.