Vodafone Group Plc continues to bleed red ink after the world’s largest mobile operator was hit with yet more impairment charges related to Germany and Italy. However interim sales grew at a healthy rate, even discounting recent acquisitions.
For the six months ending September 30, the Newbury, UK-based operator posted a net loss of 5.04bn pounds ($9.57bn), compared to a net profit of 2.82bn pounds ($5.35bn) in the year-ago period. The loss was mostly down to significant goodwill charges after Vodafone wrote down the value of its assets with an impairment charge of 6.7bn pounds ($12.7bn) in Germany, and 1.4bn pounds ($2.6bn) in Italy, which it blamed on increased competition in both markets and regulatory pressures in Germany.
This continued write-down of assets in Germany and Italy is somewhat troubling, especially considering that in May this year Vodafone was hit with a one-time charge of 23.5bn pounds ($44.31bn) after it wrote down assets in Germany as well as Italy and Sweden. This resulted in Vodafone posting the largest ever loss in UK corporate history when it revealed a year-end net loss of 21.82bn pounds ($41.1bn), compared to a net profit of 6.51bn pounds ($12.28bn) the previous year.
Meanwhile, sales for the six month period rose 7.2% (or 4.1% organically) to 15.6bn pounds ($29.6bn) from 14.5bn pounds ($27.63bn) a year ago. Sales and profits did decline in Germany, Italy, and the UK, but the operator benefited from strong performances in Spain (sales up 15.2%) and the US (Verizon Wireless sales were up 18.2%).
During the last quarter, Vodafone also added an extra 7.1 million customers, boosting its total worldwide customer base to 191.5 million.
It has certainly been an eventful six months for chief executive Arun Sarin. Earlier this year the operator was racked with a boardroom struggle between the old guard, which eventually resulted in the departure of most of the people who transformed Vodafone from a small mobile UK-based operator into the largest mobile operator in the world. These departures included Sir Christopher Gent, who resigned his position as President for Life, after dismissing claims he was behind a whispering campaign against his former protÃ©gÃ©.
Sarin also completed the sale of its Japanese unit (Vodafone KK) and exited markets in Sweden and Belgium, as part of his strategy to exit countries where Vodafone failed to gain a dominant market position. During a conference call, Vodafone played down reports it would soon exit France and Switzerland.
In recognition that Vodafone’s core markets in Western Europe (Germany, Italy, UK) had reached saturation point, Sarin looked to developing markets to ensure future growth. To this end, Vodafone purchased the Turkish mobile operator, Telsim Mobil Telekomunikasyon AS, for $4.55bn. Sarin also increased Vodafone’s stake in joint ventures in South Africa, India, and last week Egypt, where it increased its stake by 4.9% to 55.1% in Vodafone Egypt.
Sarin also survived a shareholder rebellion at the AGM in July, and was re-elected after he received the back of 85.7% of Vodafone’s shareholders. It was little wonder that he struck an optimistic tone on Tuesday.
These results show that Vodafone is on track to deliver on its key targets for the current financial year, he said. Competitive and regulatory pressures in the European region have been offset by strong performances in our developing markets and the US.
During the past six months, Vodafone has focused on cost-cutting measures, and revenue stimulation in Western Europe. To this end, it agreed to outsource its application development and maintenance services to EDS and IBM, and has reached agreement with Orange Spain to share its 3G and 2G network to minimize infrastructure costs.
Meanwhile, Vodafone is hoping to stimulate sales in its saturated markets by driving fixed-to-mobile substitution with better value mobile bundles. It is also offering customers a fixed-line broadband connection as part of their mobile package in the UK (via BT Group Plc), Italy (via Fastweb) and Germany (via Arcor).
Looking forward, Vodafone expects mobile revenue will remain in line with expectations, with organic growth in the range of 5% to 6.5%, and operating profit margins to be 1% point lower. Vodafone also lifted its interim dividend by 6.8% to 2.35 pence ($0.04) a share.
Sarin’s strategy does seem to be reassuring investors that the operator is now on the road to recovery, although shares declined slightly at 0.5% on the London Stock Exchange to 135.25 pence ($2.56).