Vodafone Sees Profit Dropping Amid Spending on Turnaround

Vodafone Group Plc forecast earnings this year will shrink as much as 11 percent amid price wars in its biggest markets and a multibillion-pound spending plan to reverse revenue declines in some markets.

The shares fell as much as 5.9 percent. Earnings before interest, taxes, depreciation and amortization in the year ending March 2015 will fall to a range of 11.4 billion pounds ($19.2 billion) to 11.9 billion pounds, the mobile-phone company said. Vodafone said it wrote down 6.6 billion pounds on the value of its businesses in its biggest market Germany, as well as Spain, Portugal, the Czech Republic and Romania last year.

Vodafone is tackling seven quarters of shrinking service sales, the revenue the company generates from calling and data plans, with a 19 billion-pound network-improvement program, its largest ever. Germany suffered from poor voice and data quality during the year as well as lower prices in the market, Chief Executive Officer Vittorio Colao said on a call with reporters.

“We have two important markets that have been challenging: Germany and Italy; we have two markets we we already see signs of improvement, the U.K. and Spain,” Colao said on the call. “Germany should improve. Italy is a bit of a question mark.”

Vodafone closed down 5.5 percent at 205.30 pence in London, the second-biggest decliner on the Stoxx 600 index and with its largest drop since Feb. 24. The stock has declined 16.6 percent over 12 months.

Network Quality

“Visibility of success is low and competitive forces remain substantial,” Robert Grindle, an analyst at Espirito Santo, said in a note to investors today. Vodafone was making “substantial investments in order to make a clearer distinction between the quality of its network and the competition.”

Fourth-quarter organic service revenue fell 3.8 percent. That compared with analysts’ average prediction for a 3.9 percent decline, according to a Bloomberg survey.

The company’s biggest markets are in Europe, where price wars and sluggish economies have pushed sales down. The company’s Vodafone Red plans offer unlimited talk time and texts to customers who sign up for data packages. Vodafone said last quarter that the plans, which can contribute to lower prices, are also reducing customer turnover.

Service revenue in Europe fell 9.1 percent last year. Italy and Spain were the hardest hit, falling 17.1 percent and 13.4 percent respectively. Germany declined 6.2 percent.

Emerging Markets

Businesses in Africa and India have helped compensate for Europe’s shrinking sales. India and Vodacom Group Ltd., the South African business controlled by Vodafone, are in the company’s top five businesses by service revenue.

Data traffic in India increased 125 percent from a year earlier with 52 million data customers. Vodafone is tapping into the growth by expanding third-generation coverage, which gives customers access to mobile Internet service, to 95 percent of the country’s population by 2016. Service revenue in the country rose 13 percent in the year.

Vodacom’s service sales grew 4.1 percent as the Johannesburg-based company expanded outside of South Africa and data revenues jumped 24 percent. The company’s M-Pesa mobile payment platform, which lets customers without bank accounts transfer and store cash using their phones, now has more than 4.4 million customers.

Verizon Proceeds

The company is using proceeds from its $130 billion sale of its stake in U.S. mobile company Verizon Wireless to fund investments in high-speed mobile and fixed Internet infrastructure worldwide.

Vodafone’s disposal of its Verizon stake led to an $82.5 billion payday for investors and shrunk the company’s value by about half. Vodafone was able to deploy the cash to shrink debt, fund its Project Spring network investment program and build capacity for deals.

This week, AT&T Inc. agreed to buy U.S. satellite TV company DirecTV for $48.5 billion in cash and stock, which may indicate that the Dallas-based phone company has less capacity to make an offer to buy Vodafone. AT&T has been interested in buying Vodafone since at least last year, people familiar with the plans have said.

Vodacom agreed to buy local Internet provider Neotel Pty Ltd. yesterday for 7 billion rand ($676 million).

Vodafone, which trails only China Mobile Ltd. in the number of wireless subscribers, is transitioning from a wireless pure-play carrier to a company that can offer data connections to customers anywhere. That means that Vodafone needs to buy or build broadband and TV infrastructure for fixed services in its biggest markets.

In March, Vodafone agreed to buy Grupo Corporativo Ono SA for 7.5 billion euros ($10.3 billion), including debt. The deal followed a 10.5 billion-euro takeover of Kabel Deutschland Holding AG last year.

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