Update: Vodafone adds users but warns that growth will slow

High market penetration, increased competition expected to weaken Vodafone's profitability

Mobile phone giant Vodafone Group on Tuesday reported a 2 percent increase in revenue for its fiscal year 2005 while narrowing its losses. The company's chief executive officer warned that high levels of market penetration and increased competition are expected to weaken profitability in the current financial period.

Vodafone credited strong global customer growth and increasing use of data services for the preliminary results. Its subscriber base increased over the year by 16.3 million subscribers in the 26 markets it operates, to 154.8 million subscribers. Vodafone counts subscribers in proportion to its holding in companies it does not wholly own. For example, in the U.S., Vodafone owns a 45 percent stake in operator Verizon Wireless.

Group revenue at the Newbury, England-based company rose to £34.1 billion ($44.0 billion as of March 31, the last day of the period being reported), compared to £33.6 billion a year earlier, it said.

Vodafone's net loss, its fifth consecutive annual loss, shrank to £7.5 billion, or £0.1139 per share, from £9 billion, or £0.1324 per share, in fiscal 2004.

Despite the warning about market conditions hampering its profitability, Vodafone said it expects to report a profit this fiscal year, due in large part to its adoption of new international financial reporting standards and the end of acquisition-related write-downs in its reporting. The company also pledged to launch a £4.5 billion share buyback program and double its dividend.

Vodafone subscribers made 170.7 billion minutes of calls during the year on networks where Vodafone has a controlling stake, up 10 percent from 154.8 billion minutes in the previous year. Revenue from nonvoice services was £4.97 billion, accounting for 17 percent of its service revenue, compared to 16.1 percent in 2004.

Messaging revenue continued to represent the largest component of nonvoice revenue at £3.6 billion, up 7 percent over the previous year.

Nonmessaging data revenue increased by 17 percent to £1.4 billion, driven by new 3G (third- generation) services, as well as its Mobile Connect data card services for business customers and its partnership with Research In Motion (RIM) to offer services over RIM's BlackBerry wireless device. Of all its international holdings, Japan generates the highest level of nonmessaging data revenue, Vodafone said.

"Our global scale and scope is finally coming into view and flowing through our financial statements," said Arun Sarin, Vodafone's CEO in a conference call.

When Vodafone launched its 3G services last November, it said that by March 2006, it expected to have signed up over 10 million 3G customers. By the end of this March, Vodafone had 2.4 million 3G devices in use, with the customers using them typically spending more each month than users of standard handsets, according to Sarin. "3G has started to grow nicely for us," he said.

Vodafone's loss for the year includes goodwill amortization and exceptional items. Excluding those factors it reported a profit of £10.3 billion, up 3 percent from £10.04 billion for its fiscal year 2004.

For the fiscal year ending March 31, 2006, Vodafone revised its revenue estimate for organic growth, rather than growth through acquisitions, to between 6 percent and 9 percent, Sarin said. The company had previously forecasted "high single-digit growth" for 2006.

Additionally, Vodafone also revised its earnings before interest, taxation, depreciation and amortization margin estimate to between "flat to 1 percentage point lower,'' Sarin said, as opposed to its previous guidance of "broadly flat" compared to 2005.

The revised forecast "reflects a slightly more competitive environment," Sarin said. "We've given ourselves a bit of room to compete."

Regionally in 2005, Vodafone said it picked up the greatest number of new users in Spain, adding 563,000 new customers in the year. However, the company said that its fourth-quarter performance in Germany and the U.K. was weaker than expected, while it experienced a sequential revenue decline in Japan. This year, Vodafone has lost about 158,800 customers in Japan, it said.

"Japan remains a key focus for us," Sarin said. "Frankly, we underperformed (in Japan) last year." He said that the company realizes it has to improve its handsets, networks and services as well as the content it offers in the Japanese market and is working to do so, in part through new management.

However, Sarin said he was pleased with the extremely strong performance from Verizon Wireless, which now has 45 million customers. "The U.S. has considerable profit potential," Sarin said, noting that this is measurably due to a comparatively low market saturation rate.

Vodafone has openly admitted that it would like to increase its share of Verizon Wireless, but that it's at an impasse with partner Verizon Communications, which would like to do the same.

Sarin appears to have more hope that Vodafone will be able to increase its 32 percent share in French mobile operator, Société Francaise du Radiotéléphone (SFR) at some point in the not-too-distant future.

Vodafone currently has "an excellent relationship" with SFR and its partner in the company, Vivendi Universal, Sarin said. However, he pointed out that Vivendi "has to decide who Vivendi are five to 10 years from now."

Once Vivendi grapples with its forward strategy, "assets will come loose. And not just mobile assets," Sarin said. "I can't tell you sitting here today when that day will be."


Copyright © 2005 IDG Communications, Inc.