Vodafone Misses Estimates, Takes $9.4 Billion Writedown

Vodafone Quarterly Service Sales Miss Estimates on Italy, Spain
Pedestrians pass a Vodafone Group Plc store in Madrid. Photographer: Angel Navarrete/Bloomberg

Vodafone Group Plc reported service revenue that missed estimates and a 5.9 billion pound ($9.4 billion) writedown in Spain and Italy that sank the world’s second-largest mobile-phone company into a first-half net loss.

Service sales fell 1.4 percent in the second quarter ended Sept. 30 excluding the impact of acquisitions and currency fluctuations, Newbury, England-based Vodafone said today. That’s the first decline in 10 quarters and double analysts’ projection for 0.7 percent contraction compiled by Bloomberg. The first-half net loss was 1.98 billion pounds, after a 6.68 billion-pound profit a year earlier.

As Europe’s sovereign-debt crisis led consumers and businesses to reduce spending, Vodafone Chief Executive Officer Vittorio Colao is increasingly relying on the carrier’s U.S. venture with Verizon Communications Inc. for cash and growth. Verizon Wireless, 45 percent owned by Vodafone, said yesterday it will distribute an $8.5 billion dividend to its owners.

“The situation in southern Europe is entirely macro-driven,” said Will Draper, a London-based analyst at Espirito Santo Investment Bank. “Verizon is performing more strongly that any of their European businesses, and it’s becoming an increasingly important part of the group.”

‘British Weather’

Vodafone, whose revenue trails China Mobile Ltd., fell 2.5 percent to close at 162.5 pence in London. The shares has declined 9.2 percent this year, compared with an 11 percent drop by the 23-member Bloomberg Europe Telecommunication Services Index.

The first-half net loss was Vodafone’s first since Colao, a former McKinsey & Co. partner, became CEO in 2008.

“The macro environment is not expected to show improvements,” Colao told analysts. “For the short term, I put this under the British weather.”

Vodafone said today it will start a 1.5 billion-pound share-repurchase program after receiving the Verizon dividend.

Full-year operating profit will be in the upper half of the estimated range of 11.1 billion pounds to 11.9 billion pounds, Vodafone said. Free cash flow will be in the lower half of the previously indicated range of 5.3 billion pounds to 5.8 billion pounds. Scrapping a full-year forecast for revenue growth, Vodafone said it plans to cut operating expenses in Europe by 300 million pounds in fiscal 2014.

Peers Decline

Deutsche Telekom AG, the former German phone monopoly, last week reported a 0.1 percent decline in third-quarter revenue and took a 7.4 billion-euro ($9.4 billion) writedown on its T-Mobile USA unit after a deal to merge it with MetroPCS Communications Inc. Telefonica SA, Spain’s biggest telecommunications company, said sales for the same period dropped 1.6 percent.

Vodafone’s organic service revenue in southern Europe slumped 9.8 percent to 4.98 billion pounds in the six months through September, led by Spain, Portugal and Italy. Spain accounted for 3.2 billion pounds of the 5.9 billion-pound writedown, with Italy taking up the remainder.

“This was a decision to not try to use the crystal ball, but say ‘Let’s say this thing doesn’t improve in the second term.’” Colao said on a conference call. “So we do whatever we think is prudent. It is not something we enjoy but it reflects the situation.”

Network Sharing

The European Commission last week cut its 2013 growth forecast for the 17-country euro region to 0.1 percent from a May prediction of 1 percent growth as the debt crisis ravages southern Europe.

“Southern Europe won’t get much worse it will just take time to repair them,” Colao said in an interview with Bloomberg Television. “Northern Europe is more resilient, and its been weathering the crisis in a better way.”

Colao, 51, has been building up Vodafone’s business outside Europe with deals like last month’s acquisition of New Zealand’s TelstraClear Ltd., and consolidating assets in Europe, such as a network-sharing deal with Telefonica in the U.K., to save money.

First-half adjusted earnings per share climbed 1.4 percent to 7.86 pence from a year earlier, beating the 7.8 pence average estimate compiled by Bloomberg.

Outside of Europe, Vodafone’s units have reported better growth. Verizon Wireless added 1.54 million contract customers last quarter, beating analysts’ estimates and raking in average monthly smartphone bills of $145.42 as users paid more for data services, Verizon Communications said last month.

Vodacom Group Ltd., Vodafone’s African business, rose 5 percent to its highest level since the company’s May 2009 listing in Johannesburg yesterday after earnings per share jumped 22 percent. The company is selling more services to customers outside of South Africa, where it’s the largest provider of mobile-phone services.

In India, where Vodafone faces a potential $2.2 billion tax bill stemming from its 2007 acquisition of Hutchison Whampoa Ltd., the U.K. company has decided against making a tax provision, Chief Financial Officer Andy Halford told analysts.

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