Vodafone’s full-year results for the period ending 31 March 2010 are encouraging given the challenges it faced in the middle of the year. However, although Europe is gradually recovering, the £2.3 billion impairment charge in India and the tightening competitive landscape across its emerging market footprint pose major concerns.
Vodafone’s most important challenge now is to stabilize its European base before its emerging market base matures.
Overall, Vodafone has performed reasonably well in its last financial year, ending 31 March 2010, with the last quarter proving particularly good for the mobile giant. Headline revenue growth for the year was up 8.4%, although much of this was down to currency gains, as organic revenues (stripping out the impact of currency fluctuations and new M&A) fell by 2.3% for the year.
Although European revenues are yet to turn into growth, much of the underlying weaknesses in the region are being flushed out. Organic revenues for the year in Europe fell by 3.5% year-on-year. But a closer look at the quarterly performance shows that the trend has been improving since the second quarter.
Away from Europe, the result is rosier. The group’s turnaround in Turkey has gone well, with revenues in Turkey jumping 31.3% in the fourth quarter of the year. Vodacom in Africa also had a good year, with revenue growth of 4.6%. Meanwhile, at Verizon Wireless the results are good too, with revenue growth of 6.3%.
Despite the encouraging news, India is becoming a difficult market. While Vodafone boosted its revenues in India by 14.7% in the financial year, much of the concern is focused on the challenges facing the business in the market. For a start, Vodafone has taken a £2.3 billion impairment charge in India, largely due to an intense price war and the regulator’s sudden readjustment of 2G spectrum fees. But this is only the beginning of Vodafone’s worries in India, as three underlying obstacles remain ahead.
Firstly, there is still the $2 billion tax bill emanating from Vodafone’s takeover of Hutchison Essar in 2007. If and when that is finally resolved, further charges may need to be applied to the business.
Secondly, the regulatory environment in India is hardly encouraging to companies operating in the market. Continuous addition of new players into an already intensely competitive market is imposing a huge burden on players.
That leads to the third concern for Vodafone as the Indian 3G auctions play out. As prices creep up above $3.5 billion, it is increasingly looking like the situation in Europe a decade ago.
This time, players like Telenor have stayed away. But to stand any chance of holding on to its existing high-end 2G customer base, Vodafone is stuck in the 3G conundrum. Without sufficient new revenues from 3G (as operators found out in Europe), Vodafone’s only hope will be to accentuate its lean operations in the market.
The concerns in India mean Vodafone is now hard pressed to stabilize its core European base before the inevitable slowdown in its emerging market operations hits revenues. Vodafone has been quick to do this and, to its credit, it has reinvented itself as a total communications provider across much of Europe.
Data services have boomed and Vodafone now has over 5.6 million fixed broadband customers. Despite being a supposedly mobile-only player a few years ago, fixed broadband contributed £3.3 billion in the year – approximately 7.4% of group revenues.
Cost-wise, Vodafone is pushing ahead with plans to trim a total of £2 billion from its cost base by 2011. However, it will need to impose a leaner operations strategy on its European base going forward.
The group has already inked network-sharing deals in several markets and trimmed its workforce. It has also embraced the femtocell model and has taken the bold step of aligning data usage to incremental revenues – something Ovum has suggested as a way out of the data bottleneck.
But the big challenge will come with the emergence of calls to build a new 4G network. If Vodafone is to get it right, it must put in place the structures to ensure that its 4G network is built lean from the start.