Ahead of today's fourth quarter and full year figures from Vodafone (VOD) analysts at investment bank Berenberg had speculated that the announcement could present a 'confusing picture' at the mobile network giant. In actual fact, the message is rather more straight-forward. Europe shows no sign of hitting a floor costing the £55 billion group another £6.6 billion write-down and Vodafone's response is to throw cash and the problem, and lots of it - £19 billion in network and store expansion over the next two years.
Underlying revenues for the year to March reversed 3.5% to £43.6 billion while earnings before interest, tax, depreciation and amortisation (ebitda) fell 7.4% to £12.8 billion. Such figures are not so very surprising, Berenberg had anticipated £12.914 billion ebitda against a consensus of £12.936. What's £100 million between friends?
More damaging is the toll on future profits the group's massive 'Project Spring' investment will take. Vodafone anticipates that ebitda will fall to between £11.4 billion and £11.9 billion by next March, a potential £1.5 billion drop. That's why investors are sniffy about today's announcement, and that's why the shares have plunged nearly 4% to 208.65p, swiping £2.25 billion off the market cap at a stroke.
The question is already being posed around the City that, for Vodafone investors, perhaps its near-£80 billion sale of its 45% stake in 'cash cow' Verizon Wireless was a mistake? Yet this misses a fundamental point – as a minority shareholder, Vodafone had no say in dividends from the US mobile business, so it might have been a cash cow one year, only to have the payout taps turned off the next. That uncertainty was no doubt part of the rationale behind the sale.
Vodafone’s strategy reflects the continued growth of smartphone adoption and data usage, and the drive towards mobile and unified communication services for consumers and enterprises. 'Like other operators, Vodafone has made a concerted effort to reduce the volatility of its revenue by locking more and more customers into long term contracts,' point out analysts at IT and communications consultancy Megabuyte. 'In-bundle revenue represented 65% of European mobile revenue, up from 58% a year earlier,' they add.
Analysts at broker Killik also see positives, namely net debt slashed in half to £13.7 billion, positive free cash flow, and favourable currency movements more than offsetting the acquisition of Kabel Deutschland, licenses and spectrum payments, and payments to shareholders. 'In line with its previous target, the group has declared a dividend of 11p for the year, 8% higher than the previous year' say Killik analysts,' adding that the group has also 'committed to grow the payout going forward.'
That said, Vodafone remains at the mercy of the thousands of off-contract pay 'n' go'ers. Perhaps the next round of spectrum licences, expected to run for 30 years rather than the 10 to 15 year range of past allocations, will help to improve earnings visibility for operators and make the sector more attractive to the buyers of assets. If so, takeover excitement could once again hit the sector and drive share prices higher. In the meantime, investors must hope that reasonably robust emerging market opportunities don't dry up before Europe's fortunes reverse.