provided another lesson in how much pessimism is priced into wireless shares Tuesday, when its $7 billion first-half loss was occasion for a sectorwide rally.
The U.K.-based wireless carrier, which co-owns
in the U.S., lost 4.34 billion pounds, or 6.41 pence a share, in the first six months of its fiscal year, compared with a loss of 9.74 billion pounds, or 14.41 pence a share, a year ago. Revenue rose to 14.9 billion pounds from 8.9 billion a year ago; excluding acquisitions, revenue jumped 14%.
Most of the loss was related to acquisition writedowns that were already publicized.
"Everyone's aware the charges are high. But
net income is not a true measure of operations or cash generation," said one London-based analyst, who declined to be named. Investors "have factored it in already and have expected it."
The loss was also slightly narrower than expected by analysts, while the revenue figure was slightly higher. Investors focused on various other positives:
The company cut its net debt to 10.7 billion pounds at Sept. 30 from 12 billion pounds on April 1.
It posted free cash flow of 2.9 billion pounds in the latest six months, nearly double what some analysts had expected.
It added 3.7 million subscribers in the three months to Sept. 30, bringing the total to 107.5 million, up from 95.6 million subscribers at the same time last year.
It predicted average customer growth would top 10% this fiscal year, while EBITDA would rise 15% next year on a 10%-plus rise in sales. It further predicted customer growth would rise 10% in the fiscal year ending March 2004.
"The results look fantastic," said BNP Paribas Equities analyst Emmet Kelly. "Very robust cash generation of 2.9 billion pounds is the key figure that investors will focus on.
The outlook given for 2004 also looks positive."
Power of Perception
That perception boosted shares in American wireless and telecom carriers.
gained 78 cents, or 12.66%, to $6.94.
shares gained $1.45, or 3.87%, to $38.96.
jumped 33 cents, or 9.17%, at $3.93.
added $1.09, or 10%, to $12.07.
Meanwhile, shares of wireless equipment vendors including
made strides after Vodafone's Sir Christopher Gent told reporters the company plans to deploy third-generation, high-speed wireless services in Japan by December and in other regions, including the U.K., by the middle of next year. Ericsson's American depositary receipts rose $1.08, or 12.71%, to $9.58, while Nokia's ADRs gained 53 cents, or 3.31%, to $16.52.
Shares of U.S. equipment sellers
gained $1.49, or 4.52% at $34.47 and
rose 39 cents, or 4.65% to $8.77.
Despite the initial euphoria from Vodafone's upside surprise, BNP Paribas' Kelly pointed out that the company's strong cash flow performance may not be a certainty in the next half. In the latest six months, the company only paid about 154 million pounds in tax. But tax charges will soar to more than a billion dollars by the end of its fiscal year ending in March 2003.
The higher rate is driven by profits from its investments in Japan. A London-based analyst noted that under Japanese corporate law, taxes are paid on profits from the prior earnings period. In the just-ended period, operating profit in the Japanese unit surged 317% to 696 million pounds in the first half of the fiscal year, meaning the company faces a liability in the second half.
Vodafone's "cash flow will be lower in the second half than in the first," said Kelly.
Also, some Wall Street analysts held a more cautious view on the likely impact for the equipment sector. While the company is forecasting double-digit growth on both new subscribers and sales through next year, Vodafone plans to achieve this, even as it cuts its capital spending by 8%, to 5.5 billion pounds, from 6 billion pounds for the current fiscal year. The company also expects to keep spending flat through 2004. Analysts had hoped for a 9% to 10% increase in spending for next year.
Lehman Brothers' U.S.-based wireless equipment analyst Tim Luke called Vodafone's upbeat news more of a "sentiment boost" than any real signs of a tangible catalyst for wireless equipment providers.
The news reiterates our belief that the fundamentals for those vendors exposed to operator capex remain challenging," wrote Luke in a research report this morning. "Vodafone's insistence that it is a growth company is reassuring, but its ability to grow revenues and EBITDA without also increasing capex highlights the challenging environment for the mobile systems market, and implies tough conditions for its key supplier."