Vodafone Calls Some Tough Shots in Europe ; TELECOMMUNICATIONS

May 30, 01:42 AM

Current Headlines: By Graeme Evans

Mobile phone giant Vodafone yesterday warned market conditions were likely to remain challenging in Europe after reporting flat annual profits.

The group made underlying profits of pounds 8.75 billion in the year to March 31, down 0.5 per cent on a year earlier, although bottom-line losses narrowed to pounds 2.38 billion.

Vodafone said it had met or exceeded financial expectations in all key areas, even though its Europe operating region suffered from increased competition and regulatory pressures. It expects this trend to continue in the current year.

Revenues in the UK edged ahead 1.5 per cent to pounds 5.12 billion, but this failed to prevent earnings in the region from falling 10.1 per cent to pounds 1.46 billion in the year. The same rate of decline was seen in Germany - Vodafone's biggest market - as revenues dipped 5.4 per cent to pounds 5.44 billion and earnings stood at pounds 2.43 billion.

As expected, Vodafone wrote down the value of its German business. However, it also took a further hit of pounds 3.5 billion to cover the impact of legislation cancelling fixed fees on the top up of prepaid cards in Italy.

The total write-down of pounds 11.6 billion was still better than the pounds 23.51 billion taken by the company a year earlier.

Stripping out the charges and other one-off factors, Vodafone's underlying earnings increased 1.6 per cent to pounds 11.96 billion.

The marketplace has become more competitive following the introduction of flexible contracts by competitors and the launch of VoIP services such as Skype, which enables telephone calls to be made over the internet.

The fall in UK margins during the year - down to 28.5 per cent from 32.2 per cent in 2006 - reflected Vodafone's bid to retain customers by reducing tariffs but keeping acquisition and retention costs, the level of subsidy paid by Vodafone on its handsets, high.

In a bid to tackle the pressure, chief executive Arun Sarin has offered customers broadband and landline services alongside mobile phones.

The company launched its Vodafone At Home service in January offering unlimited broadband and inclusive calls to any UK landline, using BT Wholesale's broadband network.

In Europe, new legislation restricting roaming call charges is set to make life more difficult for operators.

Vodafone claims that 75 per cent of its roaming revenues will be unaffected by the law and says its charges have already fallen by 40 per cent in the past two years. However the move will still hit its European revenues by around pounds 200-250 million in 2007/08.

Despite its European margins pressure, Vodafone now has around 206 million customers worldwide and the company employs more than 60,000 staff, of which more than 10,000 are based in the UK.

The main driver of earnings growth has been emerging markets. In February the mobile phone group won the battle for control of India's Hutchison Essar, although the deal had little impact on this year's results.

Vodafone won a takeover tussle with Reliance Communications and Essar itself to buy Hutchison's controlling stake for pounds 5.7 billion, reckoned to be the single largest foreign investment in India's history.

The group offset concerns over trading pressures by announcing a bigger-than-expected 11 per cent rise in its annual dividend to 6.76p a share, equivalent to a payout of pounds 3.6 billion for the financial year.

Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers, said: "There is no doubting the size of the task ahead for Vodafone, but for the moment very steady progress is being made."

Vodafone increased its dividend payout by 11 per cent, which was more than expected and amounted to a total payout of pounds 3.6 billion.

There is no doubting the size of the task ahead for Vodafone, but for the moment very steady progress is being made

Richard Hunter

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