Vodafone Rings Up Lower Revenue, but Says Organic Growth Is Steady

The British mobile telecom operator's European revenue has been squeezed by regulatory controls on mobile charges, but data flows are up and so are its fixed line services.
By Jonathan Braude ,

Revenue for British telecom heavyweight Vodafone (VOD) - Get Report (VODPF) decreased sharply in the first quarter, the company said Friday, although on certain "alternative" measures, revenue appeared stronger.

The Vodafone share hit 230.85 pence ($3.06) in early trading, up 5.75% compared with Thursday's close.

The dual accounting approach allowed CEO Vittorio Colao to tell the markets that Vodafone "continued to make progress during the first quarter," and that growth remains stable in Europe, despite a decline in the U.K. and a squeeze on roaming income.

"In Europe, our growth remains stable despite regulatory pressure on roaming revenue, with good performance in Germany, Spain and Italy," he said.

In a trading update for the period April to June 2016, Vodafone said worldwide revenue was down 4.5% compared with the same quarter in 2015 at €13.78 billion ($15.18 billion), on a GAAP basis. Service revenue was down 3.3% from €12.7 billion in Q1 2015 to €12.3 billion in the same period this year.

But Vodafone said that on an organic basis, "which presents performance on a comparable basis, both in terms of merger and acquisition activity and movements in foreign exchange rates," group service revenue was up 2.2%.

The U.K. presented particular difficulties, falling 3.2% even on the preferred organic accounting basis. This reflected the costs of migrating to a new billing system, as well as lower revenue from "out of bundle services," which consumers pay for on top of their regular monthly packages. It also reflected a surge in revenue in the same quarter of 2015 from a single enterprise contract in the fixed-line business, which has now worked through the system.

However, the company is also undergoing a period of change. As well as moving from pound to euro accounting to reflect the geographic split of the group's operations, and seeing organic growth from data services on smartphones and tablets, there has been a fundamental change at a basic infrastructure level.

"We are becoming an integrated operator for both households and businesses in our main markets," Vodafone said, reflecting its move from the mobile only model that served it well in its earlier development. "We market high speed broadband services to 74.4 million households across Europe, and through organic investment and acquisition, 29.9 million of these households are 'on-net' - serviced by our own fiber or cable infrastructure."

Hargreaves Lansdown equity analyst Nicholas Hyett said, "The market may have been spooked by Vodafone's rising capital expenditure, but after the billions spent... it's good to see growth in organic service revenues more or less across the board. The group's assertion that dividends will rise each year only really stacks up if Vodafone can eventually restore the business to reliable growth in revenues and earnings."

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