Final fix as Vodafone goes head-to-head with O2

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Vodafone UK reorganisation pays dividends at last as chief executive Guy Laurence says its improvement rate outruns O2’s

Vodafone UK chief executive Guy Laurence waited for O2 UK to release its financial results last week, for the quarter ended September 30, before proclaiming Vodafone’s return and a “two-horse race” for the lead of the UK market.

Vodafone has moved to put right certain commercial issues in the UK in recent quarters to compete in the market with O2, the UK’s leading operator brand.

This month, it sought finally to correct its prepay business in time for the Christmas quarter, which Laurence identified in these pages in August as a last hurdle to full competitiveness against O2.

Its new Freebees prepay package offers customers free texts, international calls and web access when customers top up by £10 or more. The launch is backed by a £10 million marketing spend.

Laurence said: “It is important we have put right our prepay business, which we have not done a great job on for a number of years.”

He suggested the Freebees package will be expanded and promoted with new giveaways and handsets through the end of the year, including iPhone and BlackBerry devices.

Warning signs
The business showed vigorous growth in the quarter to September 30, on the back of the reorganisation Laurence has overseen at its Newbury headquarters since his arrival early last year.

Its service revenue climbed 5.2 per cent to £1,230 million in the period, compared with the year-gap quarter, its profit (EBITDA) increased 9.6 per cent to £304 million and it outran competitors with 281,000 contract additions.

Convincingly, O2 maintained its lead with service revenue growth of 6.3 per cent annually, to £1,426 million, and a jump in profit (OIBDA) of 9.2 per cent, to £401 million. Its contract acquisitions in the period hit 236,000, or 196,000 excluding M2M subscriptions according to Vodafone.

By contrast, Everything Everywhere’s record for the period showed service revenue had slipped 0.1 per cent year-on-year to £1,586 million. Laurence accordingly dismissed its present challenge, and told of Vodafone’s improvement, putting it ahead of O2 on certain scores.

Laurence said: “Results show very clearly the UK is a market with two lead players: one with growth of 5.2 per cent and one with growth of 6.3 per cent, and then another player with negative growth.

“It is a heated industry, and you look for warning signs; you look at the respective rates of growth in service revenue, the fact that the gap [to O2] is closing in terms of EBITDA, the fact that we are adding more customers than O2, that O2 is losing customers at a faster rate, and that its contract ARPU is declining faster than ours.

“O2 has had a very good run, and I have immense respect for the job it has done, but we are very clearly back in the game now. Where a year ago, it was a one-horse race, and the horse was O2’s, these results show very clearly a two-horse race for the lead in the UK market now.”

He added: “This is an inflection point. We have two huge growth players in the UK market, and then one joint venture.”

Telefónica O2 UK chief executive Ronan Dunne was complementary of Vodafone’s latest figures, but suggested O2 is, with its parent Telefónica, now concentrated on  new competitor markets for its incremental growth.

Dunne remarked: “Vodafone’s results were good, and reflect an industry in a healthier state. But it’s not about me winning and them losing anymore. It is about the new creation of a pie big enough so we can all have a slice.”

Growth measures
But Laurence was focused on the minutiae of relative improvements in its core operation.

O2’s annual service revenue growth was up 6.3 per cent in the quarter to September 30, from an increase of 5.1 per cent in the quarter to June 30.

Improvement in its growth rate was 1.2 per cent sequentially, Vodafone noted.

Such improvement means little as a standalone statistic because of seasonal vagaries in the market, but Laurence argued relative performance can be gauged when the figure is taken with competitor numbers.

And Vodafone posted uplifts of 5.2 and 0.7 per cent in service revenue growth over the two quarters, an improvement in growth for it of 4.5 per cent, operating within the same confines as O2.

Calculations of Vodafone UK’s improvement or relative showing against O2 for EBITDA, customer numbers, ARPU and churn were selective also.

It closed the gap to O2 UK in terms of profit by around £9 million in the third quarter, from £106 million at June 30 to £97 million at September 30. Alongside, its margin improved by 0.6 per cent to 23 per cent, compared with O2’s margin increase of 0.2 per cent, climbing to 25.3 per cent.

As well, Laurence said its ARPU on contract and prepay declined at a lesser rate than O2’s (down 2.8 and 5.4 per cent, respectively, compared with slumps of 4.1 and 7.4 per cent for O2).

He also remarked on annualised churn, a statistic operators are looking to bring down; that Vodafone’s rate was up by less than O2’s (0.5 per cent to 16.1 per cent, compared with 1.4 points to 15.7 per cent). O2 disputed Vodafone’s calculation, claiming instead annualised churn of 14.4 per cent.

For net contract additions, Vodafone said O2 put on 196,000 customers last quarter and 814,000 in the year to date, compared with its run rate of 281,000 and 1.026 million in the same periods.

Laurence said: “We have produced very robust growth figures, adding over one million net new customers over three quarters, whilst broadly maintaining our profit margin and continuing to develop ARPU trends.

“This is a result of the impact we have made on customer satisfaction and the fact customers are flocking to us because of the quality of our network and the value for money in our propositions. It is very pleasing that, by polling customers who buy our services, 68 per cent of them are choosing Vodafone because of the quality of our network.”

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