Vodafone 1H14 Earnings Fall, Sales Gain; EBITDA View Up

Vodafone Group plc (VOD) announced its results for the six-month period ended Sep 30, 2014, yesterday. Shares jumped more than 5% on the day, following the news, especially buoyed by the company’s optimistic raising of its fiscal 2015 EBITDA guidance.

The company reported adjusted earnings per share of 2.63 pence (approximately 4.40 cents), down 46.5% year over year. The decline was due to Group’s lower adjusted operating profit in the period.

The company recorded consolidated revenues of £20.752 billion (approximately $34.8 billion), up 8.9% year over year on a reported basis but down 3% on an organic basis. Group service revenues (92.2% of total revenue) were up 9.2% year over year at £19.139 billion (approximately $32.1 billion) on a reported basis but down 2.8% on an organic basis.

Segment-wise Results

Europe: Revenues jumped 18.6% on a reported basis but fell 7.1% on an organic basis to £13.974 billion (approximately $23.4 billion). The organic decline was due to poor economic conditions in some markets, competitive pressure and the impact of MTR cuts, partially offset by growth of mobile in-bundle revenues. Service revenues in this segment were up 19% year over year on a reported basis but down 6.5% on an organic basis at £13.083 billion (approximately $21.9 billion).

Africa, Middle East & Asia Pacific (AMAP): Revenues from this segment declined 7.2% on a reported basis given unfavorable foreign exchange rate movements. However, the same grew 6.5% organically year over year to £6.466 billion (approximately $10.8 billion). Service revenues declined 7.7% on a reported basis but grew 5.7% organically year over year to £5.831 billion (approximately $9.8 billion) driven by customer additions and favorable pricing as well as increased demand for data. Countries like India, Qatar, Ghana and Turkey as well as Vodacom delivered strong results. This was offset by the negative impact of MTR reductions, regulatory pressure and poor market conditions in certain countries.

Subscriber Trends

At the end of Sep 30, 2014, Vodafone’s total mobile subscriber base reached 438.469 million (80.4% represented by prepaid). In Europe, the company lost approximately 1.0 million subscribers, bringing the region’s total customer base to 125.932 million. Africa, the Middle East & Asia Pacific added 4.095 million customers, taking the total subscription tally to 312.537 million.

Liquidity

Vodafone Group generated adjusted free cash flow of £1 million (approximately $1.7 million), down 99.9% year over year. The substantial decrease in free cash flow was primarily due to an investment in Project Spring. Capital expenditure was £3.9 billion (approximately $6.5 billion), up 67.5% from the year-ago period due to investments in Group’s networks for the Project Spring.

Dividend

The company’s board of directors approved an interim dividend of 3.60 pence per share (approximately 6.0 cents), up 2% from the previous financial year’s interim dividend.

Guidance

For fiscal 2015, the company now expects EBITDA in the range of £11.6 billion to £11.9 billion, up from the previous guidance of £11.4 billion to £11.9 billion. The company also expects positive free cash flow. Moreover, the company projects a £19 billion capital expenditure program of two years ending Mar 2016, which will then normalise to 13–14% of annualised revenues in the subsequent years.

Our Analysis

Continued economic weakness, regulatory pressure, stiff competition, reduction in mobile termination rates (MTRs) and roaming prices proved detrimental to the company’s growth. However, Vodafone’s strong performance in emerging markets can partially offset the challenging market conditions and render a high profit margin given lower infrastructural costs. Further, the company is increasingly undertaking efforts to shift toward more data-centric services as the level of data services in these markets is still considerably low, thus allowing opportunities for deeper penetration.

Vodafone currently has a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked stocks worth considering in this sector are SK Telecom Co. Ltd. (SKM), BlackBerry Limited (BBRY), and China Unicom (Hong Kong) Limited (CHU). While SK Telecom sports a Zacks Rank #1 (Strong Buy), both BlackBerry and China Unicom hold a Zacks Rank #2 (Buy).

Read the Full Research Report on CHU
Read the Full Research Report on SKM
Read the Full Research Report on VOD
Read the Full Research Report on BBRY


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