Vodafone Sees European Recovery After Eight-Quarter Drop

Vodafone Group Plc, the second-largest mobile-phone company, said its struggling markets in Europe are starting to improve after reporting its eighth consecutive decline in service revenue. The shares rose.

Service revenue fell 4.2 percent in the quarter ending in June, the Newbury, England-based company said today. Analysts projected a 4.4 percent drop, the average of six estimates compiled by Bloomberg.

Vodafone said that several countries in Europe, its biggest market, are able to add more customers and charge more for service -- including Germany, Italy and the U.K. -- even as all three countries still reported sales declines. The company is spending 19 billion pounds ($32 billion) on a network-upgrade plan through March 2016, shoring up services in Europe and building out its systems in high-growth markets.

“Our performance is beginning to stabilize quarter-on-quarter in several of our European markets, with customer appetite for 4G services clearly growing,” Chief Executive Officer Vittorio Colao said in a statement.

Vodafone rose as much as 3.1 percent and advanced 2.6 percent to 203.5 pence at 10:05 a.m. in London. The stock had lost 33 percent this year before today.

Service revenue was 9.4 billion pounds. Total revenue was 10.2 billion pounds, down 4.4 percent from a year earlier when excluding acquisitions and exchange-rate changes.

‘Low Point’

In Europe, which accounts for about two-thirds of Vodafone’s service revenue, the metric fell 7.9 percent with Italy reporting the biggest drop at 16.1 percent. Vodafone is investing in faster, fourth-generation wireless technology, and combining mobile phones with fixed Internet and TV, to combat price wars and sagging economies in Europe.

“Has Europe turned a corner? Yes, but it’s got a way to go,” Paul Marsch, an analyst at Berenberg Bank in London, said in an interview.

Most countries in Europe showed signs that performance may begin to improve or stabilize, except for Spain, which was hit by customers’ preferences for cheaper phones and plans, and competition for bundles of Web and phone service, Vodafone said.

Germany’s network, which suffered from poor voice and data quality last year, improved and the rates of dropped calls fell, Vodafone said. Germany is Vodafone’s biggest market by revenue.

Colao wasn’t prepared to say that Europe has bottomed out.

“We said that the first half would be a tougher repair period and we counted to have better performance in the second half,” he said on a call with reporters. “It is encouraging that some markets seem to be stabilizing, but I think it’s early to call any low point.”

Africa, India

The company’s Africa, Middle East and Asia businesses had a 4.7 percent increase in service revenue. Indian customers, Vodafone’s biggest subscriber group, pushed revenue up 10.3 percent on demand for more advanced, third-generation handsets.

Vodafone is increasingly relying on emerging markets, where more customers are adopting mobile phones and wireless Web access for the first time, to combat sluggish performance in more saturated European markets.

Vodacom Group Ltd., the African mobile operator that’s 65 percent owned by Vodafone, said data revenue jumped 23 percent last quarter, pushing total sales up 4.3 percent as customers in Tanzania, Mozambique and Lesotho signed up for service.

Vodafone said in May that profit will take a hit this fiscal year, ending in March 2015, as Europe’s price wars continue and the company carries out the network-improvement plan, called Project Spring. Earnings before interest, taxes, depreciation and amortization will fall to 11.4 billion pounds to 11.9 billion pounds, the company predicted. Ebitda was 12.8 billion pounds last year.

Rating Drop

Vodafone’s spending plans, as well as 18 billion euros ($24 billion) in deals to buy Spain’s Grupo Corporativo Ono SA and Kabel Deutschland Holding AG, spurred credit-rating provider Moody’s Investors Service to strip the company of its A3 ranking this week. Vodafone’s debt was cut one level to Baa1, the third-lowest investment grade.

“The renewed investment focus from Project Spring could turn out to be a powerful competitive advantage for Vodafone, but the company will have to demonstrate that it is able to regain pricing power from this network differentiation strategy,” Moody’s said in a statement.

Vodafone was also a potential acquisition target, with AT&T Inc. considering a bid, people familiar with the matter said this year. Still, reports about the Dallas-based company’s interest triggered British stock-market regulations, designed to limit merger speculation, and compelled AT&T to make a statement denying plans to make an offer in the next six months.

While the cooling-off period ends this month, AT&T has focused its attention at home. The company made a $48.5 billion offer for U.S. satellite-TV company DirecTV in May.

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