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Vodafone: Soz investors, we wrote down £6.6 BEELLION on Euro ops

OK, revenues are down. But we're piling £19bn into infrastructure investment

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+Analysis Vodafone’s disappointing results pulled down the share price today after it announced a whopping £6.6bn writedown of its Europe operations.

The impairment charges – which resulted in a group revenue slippage of 1.9 per cent from £43.8bn to £43.6bn – were due to competition and regulatory changes in Europe, said the telco.

We recorded impairment charges of £6.6bn relating to our businesses in Germany, Spain, Portugal, Czech Republic and Romania. These were driven by lower projected cash flows within business plans, resulting from the tougher macroeconomic environment and heavy price competition.

Looking ahead to full year 2015, it said it expected earnings of between £11.4bn to £11.9bn – below market expectations.

To soften the blow, the firm also announced a programme of "organic investment" of "£19bn over the next two years" to improve infrastructure and hence services take-up.

Voda also announced a new non-executive director, Dame Clara Furse, the former chief executive of the London Stock exchange. Furse has apparently had lots of important money-type jobs at Nomura Holdings, Amadeus Holdings Legal & General Group plc, Euroclear plc, Fortis and LIFFE Holdings plc. So just the sort of person to make financial investors feel comfortable.

The infrastructure investment plan will be called "Project Spring", and aims to provide 4G to 91 per cent of the European population and 3G to 95 per cent of the Indian population - all by the deadline of 2016. There is significant infrastructure cost, with fibre being laid to base stations and European residential areas and support being given to grow its Machine-to-Machine offerings (Vodafone fights shy of referring to M2M as Internet Of Things, as has become the fashion).

Vodafone will also modernise its 8,000 shops.

Want growth? Go to the emerging markets...

But the results show that all the growth is in emerging markets, with around 1.3 million net disconnections across Europe and 9.1 million net connections in other parts of the world.

This gives Vodafone a total of over 419 million subscribers.

The share between pre-paid and contract customers is also interesting. Globally Vodafone has 79.9 per cent of its customers pre-paid. In the UK 40.1 per cent of customers are pre-paid, while India and South Africa are almost exclusively prepaid.

Spain and the Netherlands lead contract numbers, with about 70 per cent of customers having a contract.

Just as the number of subscribers fell in Europe, so did service revenues, down 9.1 per cent. In part this is down to steep cuts in the mobile termination rate – the share in call cost a network gets for handling a received call. Generally though, the drop in MTR benefits the bigger players.

Analysis

While earnings are down, the shareholder dividend is up, and the figures are overshadowed by the $130bn sale of Verizon Wireless.

The report on the earnings put heavy emphasis on 4G, with 4.7 million customers across 14 countries now using LTE, although it’s sobering to realise that 10 times as many Vodafone customers use the M-Pesa mobile money system, which has a much lower profile in the developed world.

By contrast, EE has 3 million customers on 4G in the UK, although that network has had spectrum and the ability to sell 4G for longer. Vodafone’s 4G customers use twice as much data as its 3G customers.

Smartphone penetration is now 45 per cent in Europe (up 7 per cent on the previous year) and although Vodafone doesn’t give a smartphone figure for India, the report does say that data traffic increased there by 125 per cent.

Analyst Kester Mann from CCS Insight said:

Vodafone reported a mixed set of results. Performance was once again impacted by challenging market conditions in Europe but growth in emerging markets, notably India, along with strong planned investment in network, convergence and distribution offers optimism for improvement during the rest of 2014.

Spending more on growing coverage – particularly in the developing markets, might be sensible but the stock market reaction, as ever, is more interested in the short term. ®

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