British mobile phone giant Vodafone Group Plc (VOD) announced key performance indicators for the third quarter of fiscal 2012 (ended December 2011). In its interim statement for the quarter, the carrier reported consolidated revenue of £11.62 billion ($18.27 billion), representing a 2.3% year-over-year reduction. On an organic basis, group revenue inched up 1.6% from the year-ago quarter. Vodafone does not report earnings in its quarterly filing.
The lackluster performance in the third quarter was due to cuts in the mobile termination rate and challenging conditions in southern Europe arising from threats of recession due to the sovereign debt crisis.
Group service revenue (91.3% of total revenue) grew 0.9% year over year on an organic basis to £10.61 billion ($16.69 billion). On reported basis, group service revenue declined 3.2% year over year.
Consolidated data revenue was £1.57 billion ($2.46 billion), up 18.1% year over year (21.8% on an organic basis), boosted by strong smartphone and mobile Internet sales. Messaging revenue grew 1.1% (4.3% organically) to £1.3 billion ($2.1 billion) from the year-ago quarter while voice revenue dropped 9.3% on a reported and 4.7% on an organic basis to £6.29 billion ($9.9 billion).
Fixed-line services upped 3.2% year over year (3.9% on organic basis) to £907 million ($1.43 billion) driven by healthy broadband subscriber accretion. Other service revenue was £509 million ($800.5 million) in the third quarter, up 3.5% year over year on a reported and 7.8% on an organic basis.
Segment Results
Europe
Revenues for the European segment fell 1.9% year over year and 0.7% on an organic basis to £8.1 billion ($12.7 billion). Service revenue in Europe also slid 3.1% and 1.7% organically to £7.4 billion (11.7 billion) as growth in Germany, the UK, the Netherlands and Turkey was offset by declines across southern European markets, in particular Italy and Spain.
Africa, Middle East and Asia Pacific
The Africa, Middle East and Asia Pacific revenue slid 0.6% year over year but climbed 8.6% organically to £3.47 billion ($5.46 billion). Service revenue increased 7.6% year over year on an organic basis, driven by strong subscriber growth in India, Vodacom and Ghana, partially offset by weak performances in Australia and Egypt.
Subscriber Trends
During the reported quarter, Vodafone added roughly 10.1 million new mobile connections across its operations, bringing the total subscriber base to 398.1 million (80.4% represented by prepaid). Vodacom continued to be a key driver of subscriber growth with net addition of 5 million customers, contributing 55% to total net addition in the Asia Pacific & Middle East segment.
In Europe, the company registered a net addition of 1 million subscribers, bringing the region’s total customer base to 149.9 million at the end of December 2011. Africa, Middle East & Asia Pacific added 9.1 million customers, taking the total subscription to 248.2 million in the quarter.
Liquidity
Vodafone’s net debt reduced to £25.5 billion in the third quarter from £26.2 billion at the end of first half fiscal 2012.
The company generated free cash flow of £1.46 billion ($2.3 billion), up 34.9% year over year during the reported quarter. Vodafone invested £1.46 billion ($2.3 billion) in its business, down 5.2% from the year-ago quarter.
Guidance
Vodafone reiterated its fiscal 2012 guidance. Management expects EBITDA margin to decline at a lower rate compared to fiscal 2011 as a result of falling revenue in Southern Europe. Adjusted operating profit is expected in the range of £11.4 billion to £11.8 billion.
Free cash flow is expected in the range of £6.0 billion to £6.5 billion, excluding the £2.8 billion dividend received from Verizon Wireless in January 2012.
Our Take
Coupled with successful smartphone and data services, we believe the expansion into emerging markets such as Eastern Europe, Asia, India and Africa, divestiture of minority interests and increasing reward to shareholders will fuel the company’s future growth.
However, persistent revenue decline in southern European operations, regulatory pressure, stiff competition from larger rivals like Verizon Communications (VZ) and AT&T Inc. (T), and reductions in mobile termination rates pose major threats to the stock.
We are currently maintaining our long-term Neutral recommendation on Vodafone. For the short term (1–3 months), the stock retains a Zacks #4 (Sell) Rank.
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