Vodafone Sales Miss Estimates as Spain Spending Declines

Vodafone Group CEO Vittorio Colao
Vittorio Colao, chief executive officer of Vodafone Group Plc. Photographer: Denis Doyle/Bloomberg

Vodafone Group Plc reported first-quarter service revenue that missed analysts’ estimates as customers in Spain and Italy cut spending and growth in India slowed.

Service revenue, excluding currency swings and acquisitions, gained 0.6 percent in the three months ended June 30, the world’s second-biggest mobile-phone company said today. Analysts had predicted growth of 0.8 percent, according to the average of estimates in a Bloomberg survey. The stock dropped 1.7 percent in London.

Chief Executive Officer Vittorio Colao faces increasing competition from discounters and slower growth amid a protracted slowdown in European markets that is prompting consumers to scale back spending and businesses to cut contracts. Total sales of Newbury, England-based Vodafone fell 7.7 percent to 10.77 billion pounds ($16.9 billion), missing the 10.91 billion-pound analyst estimate.

“Things are going to get worse before they get better, probably we have to get into 2013,” said Guy Peddy, a London-based analyst with Macquarie Securities. “Operationally, they’re doing the right things; they’re just in a challenging environment. It’s hard to fight the environment.”

Merging Networks

To blunt the impact of the slowdown in Europe, its biggest market by revenue, Vodafone is merging phone networks with rivals. The company last week agreed to share its wireless infrastructure with Hutchison Whampoa Ltd. in Ireland to free cash for expanding into new technologies, such as fourth-generation high-speed mobile data networks. Vodafone has a similar agreement with Telefonica SA’s O2 unit in the U.K.

First-quarter service sales, which include voice, data, messaging and broadband services, dropped 7.7 percent in Italy and 10 percent in Spain.

“The slow-down in Italy is most concerning, as this is a high margin market,” said Emmet Kelly, an analyst with Bank of America Merrill Lynch. “The outlook is clearly now more challenging for Vodafone.”

Vodafone dropped 3.05 pence to 180 pence in London. The shares have risen 0.6 percent this year, compared with a 8.7 percent decline of the 34-company Bloomberg Europe Telecommunications Index.

‘Tough’ Outlook

“Looking out, it’s difficult to be hugely optimistic about the near term changes in things,” Chief Financial Officer Andy Halford said on a conference call. “Clearly consumers and businesses remain nervous in many territories. Our sense is we should prepare the business for a few more quarters that are going to be reasonably tough.”

Analysts are cutting European profit forecasts at the fastest rate since 2009 as the region heads for a recession and growth in China slows for a sixth quarter. While maintaining its forecast on July 16 for a 0.3 percent contraction of the euro-area economy in 2012, the IMF revised down the growth outlook for 2013 to 0.7 percent from 0.9 percent.

Some of Vodafone’s fastest growing markets, which have cushioned the blow from the European slowdown, are showing signs of strain as well, Vodafone said today. India, while clocking service sales growth of 16.2 percent, slowed from the 21.1 percent growth recorded the quarter before.

Germany, one of the best performers in Europe, grew 4.2 percent. Vodafone this week won a 4-year deal with Volkswagen AG to provide mobile services to 90,000 employees of the German carmaker. Service sales grew 18.7 percent in Turkey and 8.2 percent at Vodafone’s U.S. venture Verizon Wireless.

Dividend Decision

Vodafone, which is no longer the world’s biggest mobile-phone company after China Mobile Ltd. boosted sales last year, is increasingly relying on the U.S. to make up for shrinking sales in crisis-stricken European economies.

The company is also waiting for news about a potential dividend from Verizon Wireless, the largest U.S. mobile-phone operator, which is 55 percent controlled by Verizon Communications Inc. The partnership last year paid Vodafone a $4.5 billion dividend.

Verizon Communications yesterday reported a 19 percent gain in profit as the shift to smartphones, which let users surf the Web and watch videos, has helped boost the size of subscribers’ phone bills. CFO Fran Shammo said that the dividend issue is not on the agenda for Verizon Wireless’s board meeting next week, though a decision isn’t required until year-end.

Investor Discontent

The need for Vodafone to negotiate a payment each year from Verizon Wireless has been fanning discontent among investors. Shareholder payouts are crucial for European operators, the third-worst performer of 19 industry groups in the Europe Stoxx 600 Index this year, to attract investors as they use stable cash flows from phone contracts to pay higher-than-average dividends.

Vodafone generated free cash flow of 943 million pounds in its first quarter, 25 percent less than a year ago. Net debt stood at 22.7 billion pounds at the end of June.

Vodafone today confirmed its forecast. Vodafone said in May that service sales growth in the 12 months through March 2013 will be “slightly” below the company’s growth target of 1 percent to 4 percent.

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