Last week Vodafone Group (VOD) released an interim management statement that, considering the current economic climate, I consider to be pretty upbeat. I have been a long term holder of Vodafone stock on the London Stock Exchange and have over the last year traded the NYSE ADR up and down on swings. However with the current market, I am now looking for some growth and value plays. Looking a little closer at the report and doing some quick analysis of some of the major themes contained, I am now quite bullish on VOD going forward and will be picking up some shares for my investment portfolio. As of writing Vodafone was trading at £121.00 in London and $19.64 in New York.
Comment from Vittorio Colao, Chief Executive
“In the first quarter the service revenue trend in Europe was consistent with the previous quarter and we continued to see good growth in India and South Africa. Our total communications strategy is delivering well, with organic data revenue up 19% and organic fixed line revenue 7% ahead of the comparative period. Free cash flow generation was strong at £1.9 billion, up 21%. The Group has reaffirmed its guidance for the full year.”
Highlights from the report:
- Group: Revenue £10,743 million, up 9.3%.
- Group data revenue of £888 million, up 19.4% on an organic basis.
- Free cash flow of £1,896 million, up 21.2%; net debt at 30 June 2009 of £31.2 billion.
- Cost reduction programme on track.
- Proportionate mobile customer base of 315.3 million; 8.0 million net additions during the quarter.
- Europe: Service revenue up 4.4% driven by FX benefits. Data revenue up 17.8%. Fixed line revenue up 5.7%.
- Africa and CEE: Service revenue up 26.3% including Vodacom acquisition,Vodacom organic growth of 5.2% offset by weakness in CEE.
- Asia Pacific and Middle East: Service revenue up 21.8%.
- India service revenue growth of 23.0%.
Interesting to see Vodafone making a point of mobile data revenues and 19.4% growth is a pretty impressive statistic. Much of this being driven out of Europe, where one of the big booms in mobile data is the popularity of 3G wireless broadband dongles (USB sticks) on "Unlimited" packages, which all the major operators have adopted. Vittorio Collao announced a major cost cutting initiative last November 2008, targetting cost reductions of $1.45Bn by the end of the 2011 financial year in order to offset the pressures from inflation and the competitive environment and to enable investment in revenue growth opportunities. Savings of more than 65% of this target are expected to be generated by the end of the current financial year.
Vodafone has been at the forefront of network sharing. Originally this started in the UK with Orange, now the group has signed a pan-European deal with Telefonica-O2, which will see network sharing being implemented in Germany, Ireland, UK and Spain. Analysts see this as a huge positive, as the deal is set for a ten year term and should save each company in the region of $350 million per annum. The growth figure of 8 million subscribers runs in line with analysts global forecasts for 2009 of circa 13%, as Vodafone is one of the higher value operators in each of its markets, the fact that it is expanding subscribers in a high churn market is positive.
"Old" Europe is practically the only area where Vodafone operates both fixed and mobile services, predominantly in the UK, Ireland, Spain, Portugal and Germany, where it is the second largest provider of broadband via its Arcor business unit. Having already discussed the cost savings initiative with Telefonica, the main story here is on how Vodafone are managing to reduce churn and promote ARPU via new services. Vodafone is far and away the leader in all of these markets regards business services (excepting Germany, which is dominated by T-Mobile), with consumer playing a strong supporting role, crucially the majority of these accounts are postpaid, which is reflected in higher service revenues than is the norm in this sector.
Another area that Vodafone is finally catching onto is the machine-to-machine market, or M2M. The company has made some recent investments in this sector and is set to benefit as the market grows from $4.2Bn in 2008, forecast to rise to $12.5Bn by 2012. It's not all good upbeat news though, as recent EU intervention in roaming charges has had a detrimental effect on voice service revenues across the board. Retail termination costs have hit this part of the business very hard, with only Netherlands showing minimal growth of 0.6% mainly due to MVNO operations, whilst at the other end of the scale, Greece voice revenues sank by 15%.
In "new" Europe (CEE) and Africa, the atypical Emerging Markets, we are presented with a mixed bag, however the region saw service revenues grow by 26.5%, mainly due to Vodacom (of which more later). Vodafone has seen serious competition in Romania, where no less than 6 operators are competing for one of the lowest ARPU generating populations in Europe, the situation not being helped by the extremely poor performance of the Lei versus the Euro. Similarly, Turkey has not been the shining star that Vodafone had expected when it launched there in 2005. However, now that 3G services are finally being launched, Collao today announced that the company would be investing up to $675 million in network infrastructure over the next 12 months, as Turkey has very low fixed line connections, mobile broadband is set to be a revenue engine. I also have a feeling that as and when Turkey accedes to the EU, plenty of "rural" grant funding will be made available for the three network operators to provide near 100% coverage. At time of writing, there are some rumours of Turkcel and Vodafone entering into limited network sharing on 2G (GPRS) services, but these remain unconfirmed.
Meanwhile, Africa has seen a real boost this year, with Vodafone finally acquiring a majority interest in Vodacom South Africa from Telkom, as we discussed earlier this year in Consolidation hits Rainbow Nations telecom sector; Vodacom is now the flagship Vodafone brand in sub-Saharan Africa and has recently listed on the Johannesburg Stock Exchange. Another hit in this region is Vodafone's 40% majority holding in Kenya's Safaricom. Jointly the two companies launched the mobile payment platform M-Pesa back in 2007 and it has gone through a number of modifications and upgrades since then, winning a United Nations award along the way. The service has 5.75 million users signed up in Kenya and now that it has been proved and tested, look to Vodafone to launch M-Pesa in a number of new regions in Africa, such as Nigeria, Ghana and South Africa. An interesting video on Safaricom and M-Pesa can be viewed here: Michael Joseph, CEO Safaricom
Vodafone's controversial investment in Essar seems to be paying off handsomely, as the Indian carrier now operates in all 26 mobile circles across the sub-continent. Service revenues jumped by 23% with the subscriber base leaping 56%, or by 77 million subscribers in the last year. Vodafone will also be launching M-Pesa in India this year and it is thought that up to 17% of the subscriber base will utilise the m-payment system. Vodafone-Essar recently applied and was granted both a national Internet Service Provider and National Long Distance licences, from the Indian Government, as expectations run high on the "last mile" being finally opened. The NLD licence will have an immediate effect, as Vodafone will now be able to backhaul its own national STD voice traffic and not have to rely on local carriers, which will be a welcome development since mobile voice terminations have fallen by 5% in India in the last year.
In Asia Pacific, there is only one big story and that is the merging of Vodafone Australia and Hutchinson Whampoa's 3 in order to create a realistic competitor to government owned Telstra. The new Vodafone-Hutchinson Australia is a 50-50 JV, which will carry the Vodafone brand and now has a combined customer base of just over 6 million users. Vodafone will be looking to leverage its Vodafone Live! content platform here and significant cost savings on network (roaming charges) can be expected, the combined networks now have 98% coverage of metropolitan areas across the country. Vodafone will also receive a deferred payment of AU$500 million from Hutchison Whampoa, to reflect the difference in the joint business assets (network).
So all in all, a home run for Vodafone in its first quarter of the current financial year. Considering the global economic environment, I feel that this is a great performance (although possibly helped along by currency rates) and that if the management team can keep a firm grip on the operating companies, Vodafone should be one of the strongest performing telecoms companies for 2009-2010. Continued expansion in both India and Africa, along with the introduction of services such as M-Pesa will attract and hold valuable customers. I'm long on the ADR, having bought in last week at $18.68 and am looking for it to exceed $23.50 within three months.
Disclosure: Long Vodafone.