Vodafone Group plc (VOD) reported financial numbers for the third-quarter of 2014. The company recorded consolidated revenues of £10.881 billion (approximately $17.2 billion), up 13.5% year over year on a reported basis and 0.7% on an organic basis. Group service revenues (90% of total revenue) were up 12.4% year over year to £9.789 billion (approximately $15.5 billion) on a reported basis but down 0.4% on an organic basis.
Segment-wise Results
Europe: Revenues jumped 19.9% on a reported basis but fell 1.7% on an organic basis year over year to £7.273 billion (approximately $11.5 billion). The organic decline can be attributed to poor economic conditions in some markets, competitive pressure and the impact of MTR cuts, partially offset by growth in mobile in-bundle revenues. Service revenues in this segment were up 18.2% year over year on a reported basis but down 2.7% on an organic basis to £6.626 billion (approximately $10.5 billion).
Africa, Middle East & Asia Pacific (AMAP): Revenues at this segment increased 2.9% on a reported basis and 6.8% organically year over year to £3.461 billion (approximately $5.5 billion). Service revenues were up 2.4% on a reported basis and 5.9% organically year over year to £3.062 billion (approximately $4.8 billion) driven by customer additions and favorable pricing as well as increased demand for data. Countries like India, Qatar, Ghana and Turkey delivered strong results. This was partially offset by the negative impact of mobile termination rates (MTR) reductions, regulatory pressure and poor market conditions in certain countries as well as decline in revenues from Vodacom and New Zealand.
Subscriber Trends
At the end of Dec 31, 2014, Vodafone’s total mobile subscriber base reached 443.552 million (80.3% represented by prepaid). In Europe, the company lost approximately 0.56 million subscribers, bringing the region’s total customer count to 125.372 million. Africa, the Middle East & Asia Pacific added 6.053 million customers, taking the total subscription tally to 318.180 million. The company’s 4G customers reached 13.7 million and the service is now available in 18 markets.
Liquidity
Vodafone Group generated negative adjusted free cash flow of £11 million (approximately $17.4 million). Capital expenditure was £2.134 billion (approximately $3.4 billion), up 39.2% from the year-ago quarter owing to investments in Group’s networks for the Project Spring.
Guidance
The company reaffirmed its financial guidance for 2015.
For fiscal 2015, the company expects EBITDA in the range of £11.6 billion to £11.9 billion. The company also expects positive free cash flow. Moreover, the company intends to take up a £19 billion capital expenditure program for two years ending Mar 2016, which will then normalise to 13–14% of annualized revenues in the subsequent years.
Our Analysis
Regulatory pressure, stiff competition, reduction in MTRs and roaming prices proved detrimental to the company’s growth. However, Vodafone’s strong performance in emerging markets can partially offset the challenging market conditions and render a high profit margin given lower infrastructural costs. Further, the company is increasingly undertaking efforts to shift toward more data-centric services as the level of data services in these markets is still considerably low, thus allowing more opportunities.
Vodafone currently has a Zacks Rank #3 (Hold).
Stocks to Consider
Better-ranked stocks in this sector are China Unicom (Hong Kong) Limited (CHU), BlackBerry Limited (BBRY) and China Mobile Limited (CHL). While China Unicom sports a Zacks Rank #1 (Strong Buy), both BlackBerry and China Mobile hold a Zacks Rank #2 (Buy).
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