Vodafone Service Revenue Drops Amid Germany Price War

Vodafone Group Plc, the second-largest wireless carrier, reported first-quarter service revenue that fell less than in the prior period as improvements outside Europe helped offset ongoing price wars there.

Service sales excluding currency swings and acquisitions decreased 3.5 percent in the three months through June, the fourth consecutive quarterly decline, the Newbury, England-based company said today in a statement. That was better than the 4.2 percent drop in the previous quarter and the 3.6 percent fall analysts had projected, according to the average of six estimates compiled by Bloomberg.

Vodafone is seeing improvements in markets outside of Europe. Prices in India, the country where Vodafone has the highest minutes of use and one of the lowest customer bills on average, are “gently increasing,” Chief Executive Officer Vittorio Colao said on a conference call today, helping drive a 14 percent increase in the unit’s revenue during the quarter.

“The pace of growth in places like India and South Africa have both gotten better,” said Guy Peddy, an analyst at Macquarie Group Ltd. in London. “The outlook for the next two or three quarters for those markets is probably more encouraging.”

Colao is reducing Vodafone’s reliance on lagging European markets with investments in higher-growth countries such as India, South Africa and the U.S. The average European consumer spent $38 per month in 2012 on mobile subscriptions, compared with $69 in the U.S., according to the GSMA industry group.

Vodacom, Verizon

Vodacom Group Ltd., Vodafone’s African business, yesterday reported a 3 percent increase in quarterly revenue as more customers switched to smartphones. Sales at Vodafone’s U.S. mobile venture with Verizon Communications Inc., Verizon Wireless, grew 7.5 percent last quarter to $20 billion as it added 941,000 contract customers, the New York-based company reported yesterday.

Vodafone rose 0.7 percent to 192.70 pence at 11:05 a.m. in London trading. The shares had risen 24 percent this year through yesterday.

Excluding cuts to mobile termination rates -- what providers charge other carriers to carry calls on their network -- Vodafone’s service revenue fell 0.7 percent, the company said.

While high-growth countries are cushioning Vodafone’s sales decline, price cuts have hit Vodafone all over Europe, its biggest source of revenue. Tough competition is driving down tariffs and increasingly stringent regulation has capped what carriers can charge for roaming or connecting mobile calls, the company said.

German Sales

The German unit, which is Vodafone’s biggest and accounts for almost a fifth of revenue, reported a 5.1 percent drop in service sales. The carrier is bulking up in Germany, bidding 7.7 billion euros ($10 billion) to buy the largest cable company, Kabel Deutschland Holding AG, as it seeks to add bundled services across Europe by combining phone, Web and TV to increase customer loyalty and stabilize prices.

“The European business is actually a lot weaker than people were expecting,” Robin Bienenstock, an analyst at Sanford C Bernstein in London, said. “Most people expected Europe to get a little bit better, and it was worse.”

Vodafone will file its official offer for Kabel Deutschland to the German financial regulator “shortly,” Chief Financial Officer Andy Halford said on the conference call.

Discount Packages

Vodafone Red, the company’s discounted bundled packages of voice, text and Internet access, may be helping to drive the price wars, Peddy and Bienenstock said in today’s interviews. The packages, offered in 16 markets, have helped increase data traffic and revenue in that segment, the company said today.

“It’s them leading the pricing down in the market,” Bienenstock said. “It’s in part to get Red off the ground, but I think it’s also an attempt to reach after market share and reach after revenue.”

Vodafone said it was also under pressure to cut prices in the U.K., which contributed to a 4.5 percent decrease in service revenue there. Still, mobile sales tied to bundled services grew 1.5 percent in Britain.

Service revenue in Italy declined 17.6 percent because of “intense price competition” and the weak economy, Vodafone said. Spain fell 10.6 percent as hard-hit subscribers look for discounted bundles to save cash.

Colao said today there’s “no update” to the Verizon Wireless stake, the fate of which investors care most about, Bienenstock said. Vodafone’s 45 percent share of the largest U.S. mobile-phone company, valued at $120 billion or more by analysts including her, accounts for about half of Vodafone’s adjusted operating profit.

Majority-owner Verizon, which reported a 4.3 percent growth in revenue yesterday, is interested in buying out Vodafone’s share this year, people familiar with the matter said in March.

“The question is: ‘Will they get to yes?’” Bienenstock wrote in a note yesterday. Vodafone “needs the cash to resolve structural problems at home.”

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