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Author: Dan Bieler
15 November 2006
Vodafone reported its first half 2006/2007 results yesterday. Revenues increased by 7.2% to £15.6 billion (4.1% organic growth). EBITDA increased by 5.7% to £6.2 billion (2.8% organic growth). However, free cash flow decreased by 9.1% to £2.9 billion, partly due to tax payments and adverse developments of working capital.
Vodafone also reported an impairment charge of £8.1 billion, adjusting the goodwill on its balance sheet for Germany by £6.7 billion and Italy by £1.4 billion. The impairment charges partly reflect the increasing pricing pressure in Germany and partly the increase in long-term interest rates.
In a separate development, Vodafone announced a partnership with Yahoo to display mobile advertising for customers in the UK.
Comment: Vodafone's results paint a mixed picture. Its main European operations reported negative revenue developments with Germany at -4%, Italy -3% and the UK -1%. Only Spain saw an increase in revenues of 15%. As a region Europe saw a decline in revenues of 1%. However, excluding the mobile termination rate cuts, Europe grew by 4%. On an EBITDA basis, Vodafone reported a 2% decline. As part of the assumptions for its impairment charges, Vodafone states that it expects a compound decline of EBITDA of 5% for the next five years in Germany.
The main driver, apart from its minority stake in Verizon Wireless, remains therefore its Eastern Europe, Middle East, Africa, Asia and Pacific Area (EMAPA) activities with revenues up 20% and EBITDA 23%. In fact, Vodafone expects 70% of handset growth to come from emerging markets. Going forward, we would therefore expect further M&A activities in the EMAPA region and the revenue share from EMAPA, which currently stands at 36% of group revenues, to increase.
In the traditional markets, Vodafone will have to manage ongoing pricing pressure. Like other operators, the key challenge is that Vodafone faces an elasticity of lower than one in many markets. The increase in customers in light of the price decline is not offset by the increase in usage. Schemes designed to boost usage and stickiness, such as the Yahoo deal, are therefore key to Vodafone's future.
Big minute bundles usually generate good elasticity of around 0.8-0.9, although this is not the case in markets where extreme pricing pressure prevails, such as in Germany. In such markets Vodafone cannot fully avoid the trend. This development also partly explains why the company sticks to its EBITDA margin guidance of a one percentage point decline for the financial year, despite a stable performance in H1. Implicitly this means that Vodafone expects a 2 percentage point decline in its H2 EBITDA margin - largely due to Germany, the UK and the US where it launched significant price reductions.
With £1.4 billion of revenues coming from roaming, regulation on this issue remains crucial for Vodafone. To counter negative developments, the company has pushed its passport offering, which now has over 10 million customers. The take-up has been good as customers increasingly use their phone when abroad, thereby helping to boost elasticity and thus the roaming revenue base. No doubt, Vodafone has its work cut out.
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