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Vodafone gets emerging markets boost

Jul 22 2011 12:30 Reuters

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London - Vodafone  reassured nervy investors on Friday with results showing that faster-growing markets such as India and Turkey helped the world's largest mobile company withstand tough trading and regulation in Europe.

Sector analysts had been braced for a slew of bad results from European telecommunication companies as regulatory changes eat into margins and consumers struggle, but they had looked to Vodafone and Telenor  to shine due to their presence in the fast-growing emerging markets.

Telenor did just that earlier this week.

"We have made a good start to the year, reporting robust results despite challenging macroeconomic conditions across southern European economies and the impact of cuts to mobile termination rates," Vodafone chief executive Vittorio Colao said.

"With our broad geographical mix and improving market positions, we are well placed for the rest of the financial year."

Shares in the group were up 1.5% in Thursday mid-morning trade.

Vodafone posted first-quarter organic service revenue growth of 1.5%, down from the 2.5% growth recorded in the previous quarter but marginally ahead of a Reuters poll.

The overall performance was pulled lower by the 1.3% fall in European organic service revenue, which had accelerated from the fourth quarter as Spain in particular dragged on its fortunes.

Germany however remained resilient, as did Italy and Britain, which analysts suggested could be bad news for rival Telefonica.

European divide

Vodafone said its presence in markets such as India would allow it to reiterate its outlook, which was previously stated as full-year adjusted operating profit in the range of £11bn to £11.8, and free cash flow of £6bn to £6.5bn.

Of the key markets, India posted organic service revenue growth of 16.8% and Turkey was up 32.1%. Germany was flat and Britain was up 1.7% after cuts to the price operators charge each other to connect calls cut in to margins.

Italy was down by 1.5%, although this was an improvement on the previous quarter, and Spain was down by 9.9% as intense competition, general economic weakness and high unemployment forced prices lower.

"Buy Vodafone over Telefonica," Liberum Capital analyst Mark James said.

"Whilst Vodafone Q1 IMS shows trading in line or slightly better than expectations, there's a north-south divide with Vodafone UK and Germany beating expectations, but Vodafone Spain having a shocker with service revenues falling 10%.

"Spain remains around 40% of Telefonica."

Shares in Vodafone have risen 12% in the last 12 months, since the company announced a plan to sell minority stakes in assets it did not control. Since then it has sold a financial holding in Japan and stakes in France, China and Poland.

With that completed, and some of the proceeds returned via a buyback, analysts and investors are now turning to the 45% stake in Verizon Wireless and hoping for an announcement on when they will receive a dividend, which will strongly boost Vodafone's cash flow.

Verizon Wireless, at the direction of majority owner Verizon, had previously focused on paying down debt. Vodafone's Colao told reporters he did not have anything to add on the Verizon situation or when it would receive a dividend.

With the proceeds of the disposals still coming in, net debt was down to £23.1bn.

Chief finance officer Andy Halford said the disposals would give the company greater flexibility to make acquisitions, but he noted that the group had spectrum auctions coming up and that debt levels would rise as it continues with the buyback programme.

"The debt level is very low," he said. "I think the balance sheet is in good shape and if there are opportunities out there we can look at them, but there's not a rush to do that and it's not driven by the cash position."

Revenues from the sale of data products which give access to the internet, another key area for operators as competition pushes voice prices lower, was up by 24.5%.

Overall, group revenue for the quarter to end June was at £11.7bn.
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