Shares in Vodafone Group Plc fell on Friday after the world’s largest mobile operator warned of lower margins in two of its key European markets due to intense competition and regulatory pressures.
Vodafone management spent last Friday talking to investors and analysts about its two core operations in Germany and the UK, two of its largest and most important markets. Vodafone warned that in the UK, EBITDA margin is expected to be lower in the second half of the financial year. In the five month period ended February 2007, the EBITDA margin for Vodafone UK was down to 26.6%, from 34% for last year’s fiscal second half.
This was worse than analysts had been expecting but Vodafone laid the blame for the decline on the impact of tariff changes and commercial policies.
Vodafone’s UK management tried to offset this with news that its underlying service revenue has improved, with year-on-year growth in the two month period to February 2007 of 4.8%, up from 3.3% for the quarter ended December 2006. Vodafone said this increase was delivered by strong customer and usage growth.
Vodafone UK also signed a deal with Asda (owned by Wal-Mart) whereby the second-largest UK supermarket chain will use the Vodafone network for its own branded service. It has also signed a deal with DSG International Plc to sell Vodafone business products and services through DSG’s PC World stores, as it seeks new methods of maximizing returns out of a highly saturated market.
On the enterprise side, Vodafone increased its market share of customers in the UK enterprise segment by 4% in the last twelve months to reach 46%.
However, it is clear that Vodafone has problems in the UK, and shares in the Newbury, UK-based operator fell 4.17% to 135.7 pence ($2.65) on the London Stock Exchange on Friday.
Meanwhile in Germany, Vodafone is also facing stiff pressures as its effective price per minute has reduced by around 25% per annum, and its feeling the effects of reductions in termination rates. It believes that service revenues at its German business will fall 6% in the fourth quarter (ending March 31). In the third quarter, services revenues at Vodafone Germany fell 4.3%.
Vodafone is taking advantage of the relatively low-levels of broadband penetration in Germany via its Arcor unit, one of the alternative carriers competing against the local incumbent, Deutsche Telekom AG. Arcor now has over two million DSL customers.
To be fair, Vodafone boss Arun Sarin has long been aware of the problems Vodafone is facing in its core Western European markets, and over the past two years has begun a policy of acquiring assets in developing markets, notably in Turkey, South Africa, Egypt and India, while exiting crowded markets in Sweden, Switzerland, and Belgium.
Its most recent deal is the acquisition of Hutchison Essar Ltd, India’s forth largest operator. Sarin expects this deal to gain regulatory approval in the next few weeks.
There is little doubt that these moves into developing markets will payoff for Sarin and Vodafone in the long-term, but it is in the short-term where the operator is struggling. Sarin’s most obvious solution here is to cut costs.
Last year Vodafone announced that it was outsourcing the application development and maintenance services for its key IT systems in an effort to trim costs, and has also signed network sharing agreements with Orange in Spain and the UK.
Network sharing is the single largest cost opportunity we have in our business, Sarin told analysts at the briefing.