Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 1Q15
Prev. Ed: Jul 24, 2014, Earnings Update FY14
Flash News Update [Note: earnings update in progress; final report to follow]
On Jul 25, 2014, Vodafone Group Plc. announced its interim management statement for 1Q15. The company recorded consolidated revenues of £10.204 billion (approximately $17.2 billion), which were down 6.2% year over year on a reported basis and 4.4% on an organic basis. Group service revenues (91% of total revenue) dropped 6.4% year over year to £9.446 billion (approximately $15.9 billion) on a reported basis and decreased 4.2% on an organic basis given the impact of a challenging European economy along with rising regulatory and competitive pressures.
Segment-wise Results
Europe: Revenues increased 16.5% on a reported basis but decreased 8.9% on an organic basis year over year to £6.851 billion (approximately $11.5 billion). The organic decline was due to poor economic conditions in some markets, competitive pressure and the impact of MTR cuts, partially offset by growth in mobile in-bundle revenues. Service revenues in this segment were up 17.2% year over year on a reported basis but dropped 7.9% on an organic basis to £6.450 billion (approximately $10.9 billion).
Africa, Middle East & Asia Pacific (AMAP): Revenues at this segment declined 10.2% on a reported basis due to unfavorable foreign exchange rate movements but grew 6.1% organically year over year to £3.209 billion (approximately $5.4 billion). Service revenues declined 11.3% on a reported basis but grew 4.7% organically year over year to £2.9 billion (approximately $4.9 billion) driven by customer additions and favorable pricing as well as increased demand for data. Countries like India, Qatar, Ghana and Turkey as well as Vodacom delivered strong results. This was offset by the negative impact of MTR reductions, regulatory pressure and poor market conditions in certain countries.
Subscriber Trends
During the three-month period under review, Vodafone’s total mobile subscriber base reached 435.9 million (80.9% represented by prepaid). In Europe, the company added 33.7 million subscribers, bringing the region’s total customer base to 125.4 million. Africa, the Middle East & Asia Pacific added 72.2 million customers, taking the total subscription to 310.5 million.
Liquidity
Vodafone Group generated free cash flow of £0.6 million (approximately $1 billion). Capital expenditure was £1.9 billion (approximately $3.2 billion), up 83.4% year over year due to the initiation of a two-year investment program of £19 billion.
Guidance
The company reaffirmed its financial guidance for 2015.
For fiscal 2015, the company expects EBITDA in the range of £11.4 billion to £11.9 billion, and positive free cash flows. The company also projects a £19 billion capital expenditure program of two years ending March 2016, which will normalize to 13–14% of annualised revenues in the subsequent years.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON VOD
Portfolio Manager Executive Summary
Vodafone Group plc (VOD) provides a range of mobile telecommunications services, including voice and data communications, and is one of the largest telecommunications companies, with operations in 26 countries worldwide.
Of the 7 firms covering the stock, 6 assigned neutral ratings, 1 rendered positive ratings and none of the firms rated the stock negatively. The target prices range from $33.00 to $65.00, with the average being $44.30.
The following is a summarized opinion of the diverse brokerage viewpoints:
Cautious: Neutral or equivalent outlook (6/7 firms): These firms believe Vodafone’s goal of establishing network differentiation will bode well for growth and aid in generating outsized gains on increased mobile data traffic and network quality. Further, the company is increasingly making efforts to shift toward more data centric services than mere voice and text. As the level of data services in emerging markets remain considerably low, these provide opportunities for deeper penetration. However, despite strong growth prospects, the firm is concerned about a decline in service revenues and subscriber count, particularly in Italy and Spain. This is due to weakness in the economy, regulatory pressure and stiff competition. Additionally, the firms believe that reduction in mobile termination rates (MTRs) and roaming prices would hurt the company’s margins going forward.
Bullish: Buy or equivalent outlook (1/7 firms): These brokerage firms believe Vodafone is enjoying strong subscriber and revenue growth in emerging markets like India, Egypt and South Africa. These markets are not only key revenue drivers but also promise a high profit margin given their lower infrastructural costs than in Vodafone's established markets and can increase further with subscriber addition. The firms believe that growth in these markets can offset challenging market conditions in Southern Europe given economic volatilities in that region. Overall, the brokerage firms believe that the company’s new growth strategies will pay off in the future, driving profits higher.
The firms believe the following additional factors should also be taken into consideration before investing in the stock:
A) Vodafone is the second-largest wireless phone company in the world behind China Mobile.
B) The company has significant presence in Europe, the Middle East, Africa, Asia Pacific and the United States through the company's subsidiary undertakings, joint ventures, associated undertakings and investments.
C) On an annualized basis, the Group’s mobile data business has grown to nearly £7 billion and fixed-line revenue, primarily broadband, has grown to over £5 billion.
D) The company has set its new growth strategy, which hinges on accelerating mobile data growth opportunity, selective expansion in growth segments, driving penetration and data across attractive footprint in emerging markets, continuing capital efficient approach in Europe, as well as growth opportunities including machine-to-machine and financial services.
E) Vodafone is one of the top dividend payers in the industry and rewards its shareholders with regular dividend payments. In FY13, the company paid a total dividend of ₤0.1019 per share, which was 7% higher than dividend paid in fiscal 2012. In fiscal 2014, the company made total annual dividend payments of ₤0.11, up 8% year over year.
F) Going forward, Vodafone seeks significant balance sheet improvement with reduced debts. The company lowered its net debt to £15.5 billion in fiscal 2014 from £27 billion in FY13. In the FY15, Vodafone expects net debt to stand at approximately £23 billion or 2 times of the net debt to EBITDA ratio. Further, the company expects to achieve positive free cash flow despite a projected capital expenditure program of £19 billion over the next two years ending Mar 2016. In the subsequent years, Vodafone expects to normalize its investment rate to 13%–14% of its annualized revenues.
General Outlook
Vodafone is continuously gaining share in the majority of its markets due to the strong adoption of data services and migration to smartphones. The company’s new strategy positions it to realize further value from non-controlled assets and take full advantage of the most valuable telecommunications growth opportunities ahead. These are expected to deliver sustainable revenue growth, stabilize margins and enable strong free cash flows over the next three years.
Jul 24, 2014
Overview
The analysts have identified the following key factors for evaluating the investment merits of VOD:
Key Positive Arguments / Key Negative Arguments· Strong Market Position: Vodafone is the world’s largest mobile phone operator as per revenue and market capital, and the second largest as per the number of subscribers.
· Expansion: Vodafone's scale and scope around the world provide cost advantages, as programs can be developed in one market and rolled out to the rest at minimal additional cost.
· Growth Strategy: Vodafone is looking for expansion in emerging markets such as Europe, India and Africa through new growth strategies. The growth strategy centers on mobile data network, enterprise, emerging markets, communication, and financial services, which are expected to generate organic service revenue growth in the range of 1% to 4% per annum over the next three years.
· Healthy Pay Out Ratio: The company maintains a healthy dividend payout ratio and expects to pay a dividend of 7% per annum over the next three years.
· Cost-Cutting Initiatives: Vodafone reiterated its £1.0 billion cost reduction program over three years to offset pressures of the competitive environment and cost inflation. / · Competition: Vodafone is vulnerable to increasing global competition. European rivals are merging and becoming more global, and strong emerging market players are developing. This competition has reduced average revenue per user and the market share.
· Macroeconomic Conditions: Adverse macroeconomic conditions and deterioration in the global economic environment, such as further economic slowdown, may lead to a reduction in demand for existing and new products and services.
· Unrealized Benefits: Expected benefits from investment in networks, licenses, new technology and cost-reduction initiatives may not be realized.
· Regulation: Any unfavorable change in the regulatory environment in the form of new legislation associated with mobile termination rates or international roaming tariffs could adversely affect the pricing of wireless services, thereby creating pressure on revenue and margins.
Based in Newbury, United Kingdom, Vodafone Group Plc is a mobile communications company operating worldwide and providing a range of communications services. The company offers an array of products and services, including voice, messaging, data and fixed-line solutions and devices to assist customers in meeting their total communications needs.
Vodafone operates independently and through affiliates, notably under the Vodafone brand name. Vodafone is the leading wireless operator in the U.K. and has a major presence in Europe, the Middle East, Africa and Asia Pacific. Vodafone owned 45% of Verizon Wireless, the largest U.S. wireless service provider prior to the sale of its interest to Verizon Communication on Feb 21, 2014.
Effective Oct 1, 2013, Vodafone merged its Northern & Central Europe and Southern Europe regions into one Europe region. The company reports operating results of Turkey within the Africa, Middle East and Asia-Pacific region due to the country’s emerging market characteristics.
Ø The Africa, Middle East and Asia Pacific (AMAP) region includes the company’s interests in Egypt, India, Ghana, Kenya, Qatar, Vodacom and Turkey. Vodafone also benefits from interests in Australia, New Zealand and Fiji.
Ø Europe region includes Vodafone’s operation in Germany, the U.K., the Netherlands, the Czech Republic, Hungary, Ireland and Romania, Italy, Spain, Greece, Portugal, Albania and Malta.
Further information on the company is available at its website: www.vodafone.com.
Note: The company’s fiscal year ends in March; fiscal references differ from the calendar year.
Note: VOD reports its financial results semi-annually and releases its KPI (key performance indicator) update for every first and third quarter. Brokerage firms covering the company provide only fiscal year figures.
Jul 24, 2014
Long-Term Growth
Vodafone’s future growth hinges on five strategic components – increasing mobile data services, enlarging growth in enterprise segments by implementing converged fixed and mobile services (Vodafone One Net), expanding growth in emerging markets including Eastern Europe, India and Africa, growing in new areas including machine-to-machine, near-field communications and mobile financial services as well as maintaining liquidity while investing in quality networks.
Mobile data expansion is the key growth driver for both Vodafone and the industry at large over the next few years. Vodafone is way ahead of its competitors in upgrading 3G and HSPA+ networks. The launch of 4G Long Term Evolution (LTE) services in Germany was a huge success. Vodafone launched LTE networks in Portugal in Mar 2012 and Australia in Jun 2013.
According to the firms, ongoing efforts to upgrade the existing network infrastructure should result in higher ARPU (average revenue per user), higher minutes of use and improved operating margins through greater network efficiency. Mobile data has better prospects in emerging markets with the expected mobile penetration rate of 70% compared with 130% in mature markets. Thus, Vodafone is accelerating its investments in faster networks to boost smartphone sales and maintain growing data traffic.
Further, Vodafone aims to establish a network differentiation across all regions through a combined focus on quality networks, IT and sharing partner network. The company’s M2M platforms, mobile commerce, operator billing and One Net will provide potential incremental growth in the future. Growing data speeds and increased adoption of 3G devices (especially iPhone and BlackBerry) remain the primary drivers of data revenue growth.
Jul 24, 2014
Target Price/Valuation (In US$/ADR)
Provided below is a summary of valuations and ratings:
Rating DistributionPositive / 14.3%↓
Neutral / 85.7%↑
Negative / 0.0%↓
Avg. Target Price / $44.30↑
Digest High / $65.00
Digest Low / $33.00↓
Firms with Target Price/Total no. of Firms / 3/7
Risks to the target price include decline in the ongoing voice yields, faster loss of market share (Germany and Italy, in particular), overpayment in M&A, slowing top-line growth in emerging markets (notably India), regulatory risk, higher license costs, negative impact of Indian government regulation and taxes, and rising capex to pay for 4G deployment (in CY12 and beyond).
Recent Events
On May 20, 2014, Vodafone announced its results for the fiscal year ended Mar 31, 2014 on May 20.
The company reported adjusted earnings per share of £0.1754 (approximately $0.27), down 12.8% year over year. The company recorded consolidated revenues of £43.616 billion (approximately $69.3 billion), down 1.9% year over year on a reported basis and 3.5% on an organic basis.