Increasing competition and a limp performance by its Japanese subsidiary is likely to squeeze the margins of the wireless carrier in the coming year. Despite showering investors with doubled dividend payments of 2.7bn pounds ($4.9m) and 4.5bn pounds ($8.2bn) of share buybacks, the share price slumped in anticipation of tougher market conditions.
However, even though it was still deep in the red as a result of non-cash charges for goodwill amortization, this is a blight on its figures that will be lifted next year when it prepares figures in accordance with the International Financial Reporting Standards.
The trouble with Vodafone is that is has turned from an acquisitive tiger into a cash cow expected to produce growing financial terms to a cautious investment community. In the commoditized world of communications where rivals are everywhere and regulators ruthless, growing profits can be a tough business.
Vodafone’s strength is its global scale. Chief executive Arun Sarin said it exceeded 12% organic growth in proportionate customers, bringing the total in its 26 markets to over 154 million. The company aims to increase its present 2.1 million 3G customers to 10 million by the end of the year, with the prospect of rising ARPU from fast data services.
In its European heartland, Vodafone’s best performance was in Spain, the home market of rival Telefonica Moviles SA, where the company increased revenue by 21% to 3.26bn pounds ($5.9bn).
In the US where in February 2004 it lost out in the battle for AT&T Wireless Service Inc to Cingular Wireless LLC, the consolation is that it has saved $40bn and remains a minority shareholder in the largest US mobile operator Verizon Wireless. Proportionate revenue increased 28% in dollar terms, or 17% in pounds to 6.88bn pounds ($12.58bn).
Japan remains the problem area. Originally, Vodafone was anxious to establish a presence there to be at the forefront of cellular development, but in the last year revenue fell 6% in sterling terms to 7.39bn pounds ($13.5bn) and operating income slumped 27% to 758m pounds ($1.38bn). Trailing in third place to NTT DoCoMo and KDDI, the lack of a 3G offering meant it lost high-value customers and its market share fell from 18.4% to 17.3% over the year.
For the year ahead, Vodafone is looking for organic growth in the 6% to 9% range. But with increased competition and lower interconnect rates, the EBITDA margin is expected to be flat to 1% lower than last year. New senior management has been put in place but Sarin acknowledged it will take a year to turn the business around so that it begins to grow again. This is not an easy fix and it’s not a quick fix, he said.
