Business Watch: The clouds in Vodafone’s silver lining

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Vodafone’s UK operations had a shocker in the last financial year according to the mobile behemoth’s latest accounts, which were unveiled this week.

The good news is that the revenue decline slowed in the fourth quarter to 2.6 per cent. That was driven by higher data growth, expanded indirect distribution and new customers lured by the iPhone, which Vodafone was able to sell for the first time since O2 lost exclusivity. But that glimmer of hope needs to be the start of a continuing trend because, on all important measures, Vodafone UK went firmly backwards in the year to March 31.

Revenues were down 4.7 per cent at £4.71 billion with lower voice revenue – primarily due to lower mobile termination rates, ferocious competition and economic pressure. The company said that cash-strapped consumers had optimised their bundle usage and, while abroad, lowered the amount of time they spent on their mobiles and the number of texts sent in a bid to avoid painful roaming charges.

These negative factors were only partially offset by higher messaging revenue, strength growth in data driven by the success of mobile internet bundles and higher wholesale revenue derived from the company’s existing MVNO agreements.

But even so, underlying earnings dropped by a slightly alarming 17.7 per cent to £1.37 billion.

Indeed, the back of the group accounts show that Vodafone UK generated £662 billion in cash during the year, which sounds like a lot, but it’s down from some £934 billion a year earlier. That sort of thing hurts. It was caused by the lower service revenue but also by increased spending to attract new customers and stop existing ones defecting to other companies.

Vodafone UK wasn’t hugely successful at attracting and retaining customers in the January to March quarter though: it lost almost 100,000 punters taking the customer base to 19 million – more than half of whom remain on prepay.

And while, for the first time in two years, more customers kept their mobile phone number and moved over to Vodafone UK than took their number and left (thank you iPhone), churn in the UK is still, at 38.5 per cent, the highest of Vodafone’s big four European markets.

It’s little wonder the company is trying to cut costs: if your revenues are going backwards, the only way to keep your margins and profits rising is to reduce your cost base. The business said it has been “streamlining processing”, “outsourcing” some activities and has reduced spend on publicity and consultancy.

Expect more cuts to follow soon, I reckon.

Indian troubles
And while Vodafone’s European operations continue to struggle – with revenues and underlying earnings down 3.5 per cent and 7.3 per cent respectively – things aren’t looking too pretty in its biggest emerging market operation either.

It’s been forced to book a socking great writedown – some £2.3 billion – on the value of its stake in India’s Vodafone Essar. The multibillion dollar acquisition of that stake was viewed by many as a stroke of genius by then-chief executive Arun Sarin in 2007.

Full article in Mobile News issue 464 (May 24, 2010).

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