Vodafone's Colao May Boost Bet on Data as Voice Margins Decline

Vodafone Group Plc Chief Executive Officer Vittorio Colao made driving mobile data use a priority shortly after taking over in 2008.

Two years after his first strategy review for the world’s largest mobile-phone operator, he may tomorrow present a goal that focuses on squeezing more profit out of growing data revenue. On Colao’s watch, sales from mobile data have climbed 43 percent to 4 billion pounds ($6.5 billion).

“Colao will say this is a bigger opportunity than we thought initially and will stress Vodafone’s ability to capitalise on that,” said Will Draper, an analyst at Execution Noble in London, who rates the stock a “buy.” “It’s more sharpening up the message and talking up the opportunity.”

Vodafone, like all phone operators faced with falling margins on traditional voice offerings, has pushed smartphones and invested in networks to ride the wave of demand for data- hungry services such as the Internet, music and video on mobile devices. The sale of Apple Inc.’s iPhones helped it return to service revenue growth in the quarter ended June following 1 ½ years of declines.

Now, Colao needs to turn the rising sales into margin growth. “The data bet is the right bet,” Colao said in July. “Two years down the road, it’s about time to refresh and update” the strategy.

Earnings Expectations

Vodafone, based in Newbury, England, may say tomorrow that earnings before interest, taxes, depreciation and amortization in the first half ended Sept. 30 fell 2.3 percent to 7.29 billion pounds ($11.8 billion) even as sales rose, according to analysts surveyed by Bloomberg. Sales may have risen 2.8 percent to 22.4 billion pounds from 21.8 billion pounds a year earlier.

In the year ended March, the Ebitda margin fell by 2.2 percentage points to 33.1 percent.

“First of all they have got to protect the margins,” said Derek Mitchell, a fund manager at Royal London Asset Management, who said he sold all his Vodafone shares in the summer. “In the telecoms industry it’s been downwards for perhaps too long.”

Vodafone shares have advanced 21 percent this year, making them the second-best performers on the Stoxx 600 Telecommunications Index after Tele2 AB of Sweden. Deutsche Telekom AG shares are little changed and Telefonica has dropped 1.4 percent in the same period.

Vodafone plans to increase the percentage of sales from smartphones in Europe to about 70 percent in the fiscal year 2012 to 2013 from 30 percent in 2010, it said in September.

Tiered Pricing

The company also intends to switch to tiered pricing plans based on the amount of data use and quality of service from its fiscal third quarter, Colao said in September at a Goldman Sachs Group Inc. conference in New York.

“I hope they find a method to make customers pay for data,” said Ulf Moritzen, who helps manage 1 billion euros ($1.4 billion) at Hamburg-based Aramea Asset Management including Vodafone shares. “They still seem to be in a downward spiral with everything getting cheaper.”

Last week, Deutsche Telekom AG reported declining operating profit on costs to subsidise mobile phones in the U.S.

About 11 percent of Vodafone’s users have smartphones. The company, which initially missed out on selling iPhones in the U.K. to Telefonica SA’s O2, is now offering the device in its home market and in Germany and the Netherlands.

Vodafone is seeking to roll out networks to support the increased demand for data and can start to “make the arguments for network investment as core to their business,” according to Robin Bienenstock, an analyst at Sanford C Bernstein.

Verizon, SFR

In Italy, Vodafone signed an agreement with Huawei Technologies Co. to invest 1 billion euros in mobile broadband coverage over three-to-four years.

The investments will come as Colao determines the company’s priority areas and gets out of businesses that are not central to Vodafone’s growth.

Vodafone in September sold a stake in China Mobile Ltd. for $6.5 billion in the biggest divestment since Colao took charge.

The CEO is also reviewing stakes in French mobile-phone company SFR and U.S. operator Verizon Wireless and is considering a sale of Vodafone’s holding in Polkomtel SA, Poland’s biggest mobile-phone operator.

“We’ve seen the first move created by shareholders and the disposal of China Mobile,” Royal London’s Mitchell said. “Tidying up their portfolio will enable them to concentrate on assets that they can start to grow.”

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net.

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net.

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