Vodafone Group plc Revenue Hit By European Competition

Vodafone Group plc (LON: VOD) saw sales fall in main European markets, offsetting strong emerging market performance.

Mark Stones

Mark Stones (TMFMumbojumbones) joined The Motley Fool in 2014 and initially worked as a writer for Fool.co.uk, before joining the Fool’s analyst programme. Mark earned a BA in English from Loughborough University. Although he spends more time reading annual reports than Russian literature these days, he still appreciates a novelist’s antipathy toward the accepted view, which is a useful attitude when trying to sniff out hidden gems on the stock market. His approach to investing has been largely influenced by the principles of Warren Buffett and Peter Lynch. He also takes a special interest in the work of healthcare companies. Outside of investing, Mark plays guitar, enjoys good writing and has a guilty passion for combat sports.

Published 6 February, 2014 9:45 am GMT

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The shares of Vodafone (LSE: VOD) (NASDAQ: VOD.US) added 4p to 220p during early trade this morning, after the phone company announced a fall in company revenues due to poor European performance. This was a result of intense price competition with rivals, restrained consumer spending and a fall in the number of calls made by customers. The stock has risen 27% over the last year, largely based on the £84 billion sale of Verizon Wireless, resulting in a large dividend windfall and subsequent takeover speculation.

Vodafone, the world’s second largest mobile carrier, reported a 5% drop in revenues across the three months ended December 31st. Revenues in Europe were down 10% compared with a year ago, while in the UK sales were down 5%. Sales across Germany, Spain and Italy were also down as the group competes with the likes of Orange, Telefonica and Deutsche Telecom. Vodafone is looking to cut around 600 jobs in Germany, which is the group’s largest European market, after revenue fell by 8%.

The fall in revenue across Europe outweighed growth in emerging markets, with revenue growing across India, Turkey, Egypt and South Africa. This was driven by an increase in customers, with a rise in the number of mobile internet users leading to more data being used. The growth in data consumption saw 4G, available in 13 countries, boost customers by 470,000 since its launch in August.

Capital expenditure slightly increased, leading to a £200 million fall in cash flow to £1 billion. Net debt increased by nearly £6 billion to £32 billion following the acquisition of Kabel Deutschland.

Vittorio Colao, chief executive, commented:

“Our emerging market businesses are growing strongly, supported by consistent execution and accelerating demand for data. In Europe, conditions are still difficult, and we continue to mitigate these challenges through on-going improvements to our operating model and cost efficiency. In addition, the shift to 4G is gaining momentum and we have seen improving mobile customer net addition trends. We are therefore optimistic that our revenue performance will begin to improve as regulatory headwinds ease and customer appetite for video and content services increases.

“During the quarter we have made further progress in executing our long-term strategy. Project Spring, our £7 billion organic investment programme, will accelerate our plans to establish stronger network and service differentiation for our customers, with the first elements of the programme already initiated. After the imminent completion of the Verizon Wireless transaction, we will be very attractively positioned, with a strong balance sheet, improved dividend cover and the financial and strategic flexibility to make further investments in the business or returns to shareholders in the future.”

Before today analysts were predicting Vodafone’s upcoming annual results would show earnings of 9p per share, and a dividend equivalent to 11 p per share.

After this morning’s price movement the shares trade on a P/E of 24 and offer a potential income of 5%. Of course, the decision to ‘buy’ — based on these ratings, today’s results and the wider prospects for the telecoms sector — is solely your decision.