Vodafone Group plc (VOD) announced its interim management statement for the third quarter ended Dec 31, 2013 on Feb 6.
The company recorded consolidated revenue of £10.977 billion (approximately $17.8 billion), which was down 3.6% year over year on a reported basis and 4.3% on an organic basis. Group service revenues (91% of total revenue) dropped 3.3% year over year to £9.856 billion (approximately $15.95 billion) on a reported basis and decreased 4.8% on an organic basis given the impact of a challenging European economy along with rising regulatory and competitive pressures.
Despite recording a year-over-year revenue decline, the company’s share price saw an uptrend and closed 43 cents higher than the opening at $36.67 on Thursday.
Segment Results
Europe:Revenues declined 3.1% on a reported basis but decreased 10.1% on an organic basis year over year to £7.1 billion (approximately $11.5 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 2.7% year over year on a reported basis but dropped 9.6% on an organic basis to £6.5 billion (approximately $10.5 billion).
Africa, Middle East & Asia Pacific (AMAP): Revenues from this segment declined 6% on a reported basis given unfavorable foreign exchange rate movements but grew 7.5% organically year over year to £3.7 billion (approximately $5.9 billion). Service revenues declined 6.1% on a reported basis and grew 5.5% organically year over year to £3.2 billion (approximately $5.2 billion) driven by customer additions and favorable pricing as well as increased demand for data. Countries like India, Qatar, Ghana and Turkey as well as Vodacom delivered strong results. This was offset by the negative impact of MTR reductions, regulatory pressure and poor market conditions in certain countries.
Subscriber Trends
During the three-month period under review, Vodafone’s total mobile subscriber base reached 419.4 million (79.8% represented by prepaid). In Europe, the company lost 347,000 subscribers, bringing the region’s total customer base to 122 million. Africa, the Middle East & Asia Pacific added 8.3 million customers, taking the total subscription to 297.4 million.
Liquidity
Vodafone Group generated free cash flow of £1.031 billion (approximately $1.7 billion), down 14.2% year over year. Capital expenditure was £1.8 billion (approximately $2.9 billion), up 14.2% from the corresponding year-ago period.
Guidance
For the full year, the company maintains its projection for adjusted operating profit of £5 billion and free cash flow in the range of £4.5–£5.0 billion.
Transaction with Verizon Communications Inc. (VZ)
On Sep 2 2013, Vodafone announced its agreement to sell its 45% interest in Verizon Wireless to Verizon Communication for a total consideration of US$130 billion or £79 billion. The proceeds would be divided in a cash consideration of $58.9 billion (£35.9 billion) and $60.2 billion (£36.7 billion) in Verizon shares. Further the company would receive $5.0 billion (£3.1 billion) in Verizon loan notes, $3.5 billion (£2.1 billion) as Verizon’s 23% minority interest in Vodafone Italy and $2.5 billion (£1.5 billion) as transfer of Vodafone’s net liabilities in Verizon Wireless to Verizon.
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 were 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 (TEF) and Orange (ORAN), currently has a Zacks Rank #4 (Sell).
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