Vodafone's Q3 result is just OK

Vodafone's last quarterly result for 2008 has turned out as a bit of an anti-climax, offering no surprises and little drama. While Europe continued to struggle with declining revenues, Vodafone's emerging market operations are no longer turning out sumptuous growth, creating potential concerns for the future.

At a time of heightened economic worry, Vodafone's result is pretty OK. No surprises, no sticking points and little drama. The operator has managed to steady its business, and has avoided the sort of doom that was reported by the mobile handset makers.

Thanks to the sinking British pound, Vodafone reported a 14.3% rise in headline revenue for the quarter ending 31 December 2008. Although the group's organic revenue was down 1%, there were several green shoots of recovery across its major European markets. In Italy, Germany and the United Kingdom, Vodafone improved its quarterly year-on-year growth compared to the previous quarter.

In other markets, the group enjoyed steady growth in mobile data revenues and is well positioned to improve its revenue intake as it builds out its high-speed networks.

But it wasn't all good news as Spain showed once again that the economic gloom is not yet over. Indeed, the group's performance in Spain deteriorated sharply with revenue falling by 5.8% in the quarter compared to 2.2% in the previous quarter. Vodafone's Turkish operations also performed woefully in the quarter, with revenues declining significantly.  Vodafone said it now has a new management team in place to turn around the business.

Although there was no headline-grabbing figures from Vodafone's emerging market performance, the group's Q3 results points to a decisive slow down in growth rates for its emerging markets, bringing them closer to European performance a couple of years ago.

Emerging markets

Growth in its Asia Pacific & Middle East region (including India) has now fallen to single digits for the first time. For its Africa & Central Europe operations, growth has fallen to below 5% too. Indeed, emerging markets are maturing quicker than anticipated, posing huge challenges for Vodafone and other operators who have pursued an emerging market expansionist strategy.

Indeed, whereas Vodafone has long relied on expansion to prop up its revenue growth credentials, gradually slowing revenue growth trends in its emerging market operations means group-wide growth will become much tougher in the future.

In November 2008, Vodafone replaced its "expansionist" strategy with an "efficiency" strategy as it sought to grind out results from its European markets. However, given the prevailing conditions, it may, unfortunately, have to prepare to grind out results from its emerging market operations much sooner. 

Admittedly, there is still huge growth potential in Vodafone's emerging market footprint and the company has a substantial head start in providing mobile broadband services in markets without significant fixed telecoms infrastructure. It already enjoys solid growth at its Vodacom unit thanks to a steady boost in mobile data usage in Africa.

As Vodafone signs up partnership deals with MTS in Russia and du in UAE, these short-cut approaches could offer synergies for Vodafone across its entire footprint. Vodafone wants these partnerships so as to enjoy greater scale and scope when negotiating equipment deals; hoping to enjoy acquisition-like benefits without spending the money on the acquisitions.

 

The group is also interested in greater cooperation with its two other affiliates - Verizon Wireless and China Mobile.

In the groups more mature markets in Europe, the partnerships will enable greater speed in technology trials and could facilitate greater consensus for telecoms standards such as for mobile TV.

Crucially too for Vodafone, these partnerships can give incremental synergies across its emerging market footprint as it facilitates lower equipment and handset costs.

Emeka Obiodu, Senior Analyst

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