Vodafone's Q3 torpedoed by European weakness

Operator's shares climb on analyst upgrades
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Vodafone's third-quarter service revenues fell 2.6 per cent, hit by poor results from across northern Europe and a slowdown in previously robust emerging markets.

The company also warned there were no indications of any upswing in recession-hit European markets after it posted the first decline in underlying group revenues in three years, according to the Financial Times.

Vodafone CEO Vittorio Colao told the FT that growth in its emerging market operations in India and Turkey had been more than offset by the impact of macroeconomic, regulatory and competitive pressures in Europe. "We do not see a dramatic change in Europe in the coming quarters so expect [further] headwinds," he said, although he restated the group's guidance for the full year.

Despite these gloomy third-quarter numbers, which were below analysts' expectations, Vodafone's shares rose by 1.7 per cent after the stock market feared that the UK-based operator would mimic the disastrous results KPN and Belgium's Mobistar recently reported. "[The] early spike in the share price is acknowledgment of progress being made," Hargreaves Lansdown's head of equities Richard Hunter told Reuters. "There is also much to do."

"Plans are afoot to ratchet up the cost efficiency programme," Hunter said. "Meanwhile, the Indian tax case, general regulatory overhang and the fiercely competitive nature of Vodafone's industry remain serious headwinds."

The worsening service revenues in Germany and UK, which have so far proven healthy, are a worry. Overall, revenue was down on an organic basis in Germany by 0.2 per cent, the UK was down by 5.2 per cent, Italy down by 13.8 per cent and Spain was down by 11.3 per cent, according to Reuters.

Sanford C. Bernstein analyst Robin Bienenstock was particularly bearish: "We expect peer results to show that Vodafone is doing worse than peers. The pace of decline almost doubled in Europe while (emerging market) growth fell by about a third."

But Charles Stanley analyst Jeremy Batstone-Carr is more upbeat, and, according to CityWire he wrote that the results came as no surprise to analysts. "The results were a bit dismal, involving further sequential deterioration, but this was against the background of very low expectations as the headwinds of European macro, medium-term revenue reductions and increasing competition were clear to investors," he wrote.

This viewpoint was echoed by Bank of America Merrill Lynch, which has upgraded Vodafone from neutral to a "buy." This shift was sparked by continued industry chatter over a possible takeover by Verizonn Communications of Verizon Wireless, in which Vodafone holds a 45 per cent stake, according to ProActive Investor.

For more:
- see this release
- see this FT article (sub. req.)
- see this Reuters article
- see this CityWire article
- see this ProActive Investor article

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