The better we do, the worse our profits is not an obvious axiom, but it app-lies to Vodafone Group Plc – at least for the next year or two. The cellular telephony company announced results at the high-end of analysts’ expectations yesterday, and shares jumped by 11 pence to 532 pence in the half hour following the figures’ release. However Vodafone repeatedly warned that its efforts to penetrate overseas markets would cause a short-term drag on the group’s profit growth as the start-up costs are written off. It is a classic strategy, familiar to players of the board game Monopoly who rush to buy property and build houses: after all there is only a limited amount of real estate out there. The equivalent to a hotel on Park Lane in the cellu-lar game however, involves getting bids in quickly for overseas franchises. The year 1994-95 is expected to see the Vodafone’s overseas losses peak, after which they should begin earning their keep. In the meantime the company has not only got to got to absorb the foreign operating losses – it has also got to accept the lost interest payments that it would have received if it had left the money in the bank. Together these account for an overseas loss of UKP13m, compared with a loss of UKP1.2m last year. Strip this out of the figures and Vodafone’s pre-tax profit would have grown by 16.4% rather than 8.9% and consequently the group is increasing its interim dividend payment by 20% to 4.12 pence. Expect these overseas losses to be around UKP25m for the full year and in the order of twice that next year as the company plays out Gerry Went’s previously strategy to achieve as many GNP-adjusted ‘pops’ outside the UK as within the UK by December 1994. For the uninitiated, a ‘pop’ is a potential customer and to achieve the target, the company needs to find another 13.4m overseas GNP-adjusted pops, to add to its current 42.6m. Julian Horn-Smith, managing director of Vodafone Group International Ltd, said that the Netherlands, Italy, Spain and Belgium are prime targets for consortia deals next year – if they were all to go through then Vodafone would beat its overseas targets easily. The two new networks that started operation this year are Vodafone Pty in Australia, in which the Group has a 95% stake and Panafon in Greece where it holds 45%. E-Plus in Germany and Vodaco in South Africa – where it has 35% – are due to open next year. A new network operating licence was also awarded in Fiji where it has 49%. Capital investments are expected to total UKP280m – overseas taking UKP90m with UKP190m in the UK. For the first time, next year’s estimates show the overseas spending leap-frogging that it the UK – with UKP140m going abroad and UKP110m at home. However, there is also a possible start-up cost lurking in the UK: Vodafone holds 35% of the Great British Lottery consortium, one of the bidders to run the new UK national gambling game. Should the deal go Vodafone’s way – and the decision is expected around February next year the company will find itself with yet more, significant, start-up costs, though chairman Gerry Whent says that there will only be one year of pain.
Economy-class niche
Despite the increased competition in the UK mobile market, Vodafone seems to be holding its own. The company had about 55% of the total subscriber base for mobile phones, down from 56% last year. However these exclude any figures from Mercury Communications Ltd’s new One-2-One Personal Communication Network. Whent tries to characterise the Mercury offering as in an economy-class niche of its own and points out that both Cellnet Mobile Communications Ltd and Vodafone connection rates actually increased following the One-2-One advertising campaign. Whent is similarly dismissive of Hutchison Telecom UK Ltd’s Microtel service – due for launch next year. Hutchison will behave responsibly he believes and argues that Hong-Kong based Whampoa will dissuade the UK operation it from starting a price war. As a result, Vodafone’s own tariffs should remain stable next year, Whent believes. This year’s round of price cu
ts have affected revenue per subscriber, though – it now stands at around UKP710 for business customers and UKP240 for the Lowcall economy rate; cared to a peak of about UKP735 and UKP285 pre-cuts. Net new connections stood at 108,000 – an increase in 130% from last year – 76,000 at the business rate, 50,000 at the Lowcall rate and 4,500 for the new Eurodigital and Metrodigital services. The digital uptake has been slower than expected – due to problems in getting the phones to market. Can the company continue to sustain these start-up costs? Cash to hand and at the bank totalled UKP186m, enough, says finance chief Ken Hydon, to continue developing its existing businesses from internally-generated funds. However, he acknowledges that relatively small amounts of debt could be required if several new licences were won and substantial new investment opportunities occurred over a relatively short period. These opportunities would, of course, be welcome even if they do stretch resources, he commented.
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