Vodafone sees first signs of recovery in Europe - Key European markets boosted by strong data growth, but weaknesses remain

Vodafone last week reported a long-awaited return to organic revenue growth for its latest financial quarter on the back of improving revenue trends at its key European division. Vodafone reported a 1.1 percent rise in year-on-year group service revenue to £10.6 billion for the quarter-ended June, the first time it has posted positive growth since the onset of the global recession in 2008. The figures beat most analysts’ expectations, which guided for a decline. Growth was driven mainly by Vodafone’s subsidiaries outside of Europe, notably in India. However, its key Europe division – which accounts for over two thirds of group revenue (see table) – reported its best revenue figures for a year.

European service revenue growth improved for the fourth successive quarter, but was still down 1.7 percent from a year earlier. The improvement was credited to a 23 percent rise in data revenues linked to a rise in smartphones and other data-centric devices. Vodafone said that its smartphone penetration in Europe is now at 14.2 percent, with around 35 percent of its European customers considered to be using a ‘data product.’ Some 51 percent of its smartphone customers are also reported to be buying additional data plans. However, the rise in data usage failed to compensate for an 8.6 percent decline in European voice revenue caused partly by ongoing regulatory pressures (notably the cuts in EU roaming and termination rate cuts in some markets). Vodafone’s current focus on data in Europe aims at mitigating the effects of declining voice revenue, but it is expected to be some time before data revenues are large enough to offset voice entirely.

Vodafone highlighted a return to organic service revenue growth at two of its key European markets, the UK and Germany. Vodafone Germany, the group’s largest single global market in terms of revenue, grew annual service revenue by 0.2 percent – its first positive growth for a year. The subsidiary reported a 31 percent rise in annual data revenue due to the increasing penetration of smartphones and other smart devices (including Apple’s iPad, which it launched in June). However, there were alarming declines in traditional voice revenue, which declined 10 percent over the year, and messaging revenue, which was down 2 percent. The subsidiary also remains heavily dependent on fixed-line revenues, which grew by 0.1 percent over the year and accounts for around a quarter of German service revenue.

Vodafone Germany added positive customer net additions (336,000) for the first time since the third calendar quarter of 2008, consolidating its position as the second-largest mobile network in the country (after Deutsche Telekom) at around a 32 percent market share. However, there is evidence that customer migration from prepaid to more lucrative contract-based subscriptions is not happening quickly enough in Germany. Its percentage of prepaid customers was flat year-on-year at 54 percent and actually rose slightly from Vodafone’s last fiscal quarter.

In the UK, Vodafone also achieved a return to growth following a year of declines, reporting a 0.7 percent increase in service revenue. As in Germany, this was due primarily to a 28 percent rise in data revenue linked to its focus on mobile Internet and mobile broadband services. The operator also cited strong high-value contract customer additions and growth in its enterprise business. However, this focus on high-value segments meant its overall UK market share contracted in the period as it lost 163,000 customers (net).

In the majority of Vodafone’s other major European markets, the influence of increased data revenue was not so marked. Service revenue declined in Spain (down 6.2 percent) and Italy (down 2.5 percent) as Vodafone struggled amid intense competition. Vodafone also cited the recent economic problems in the eurozone, which it claimed affected its business in Greece (where it lost over half a million customers in the quarter) and its other southern European markets such as Albania, Malta and Portugal. The Netherlands was the only market in its ‘Other Europe’ segment to report service revenue growth.

Matt Ablott, Analyst, GSMA Intelligence:

The recovery in its European markets is essential if Vodafone is to achieve its operational targets first announced in November 2008. The group has since managed to trim £1 billion in costs and is targeting a further £1 billion in savings by 2012. However, operating expenses and customer costs in Europe actually increased between FY2009 and FY2010. This meant that - despite slightly higher revenues - full year EBITDA and operating profit in Europe were down on the previous year. The return to organic revenue growth in key markets such as the UK and Germany is therefore an encouraging sign but the underlying numbers in Europe still show some weaknesses. Smartphone penetration and mobile broadband is beginning to account for a significant amount of revenue in such markets, but the associated costs in supporting these services – via expensive smartphone subsidies, for example – will continue to negatively impact EBITDA moving forward. Indeed, EBITDA is still declining in most of Vodafone’s European markets and the group continues to guide for a decline in its EBITDA margin for its current fiscal year (albeit at a reduced rate). The group also needs to show progress in migrating its European customer base from prepaid to contract – a trend that appears to be going backwards in Germany - to protect against churn. Nevertheless, Vodafone’s strategy of targeting high-value data users in Europe is beginning to show progress, and should go some way to silencing shareholder disquiet over its perceived inability to extract true value from many of its mature markets.