Vodafone's Profitability, Growth to Fall; Shares Sink (Update2)
Vodafone's Profitability, Growth to Fall; Shares Sink (Update2)
Nov. 15 (Bloomberg) -- Vodafone Group Plc, the world's largest mobile-phone provider, forecast declining profitability and slowing sales growth as its Japanese division soaks up investment and Western European markets mature.
Vodafone shares had their biggest decline in 3 1/2 years after the company said revenue growth will slow for a third year in the 12 months to March 2007, and the profit margin will drop for a second year. Fiscal first-half profit also fell, Newbury, England-based Vodafone said in a statement today.
The company, under Chief Executive Arun Sarin, forecast a ``significant'' profitability decline next fiscal year in Japan, Vodafone's biggest market, as it spends more to win customers from NTT DoCoMo Inc. and KDDI Corp. Vodafone also faces increasing competition in Germany, Italy and Spain, Sarin said in an interview.
``Japan is the area that's been a worry and that is what's affecting margins,'' said Alan Beaney, who helps manage $1.2 billion, including Vodafone shares, at Principal Investment Management in Sevenoaks, England. The trends are ``slightly weaker.''
Shares of Vodafone fell as much as 15.5 pence, or 10.7 percent, to 129.5 pence and traded at 131.5 pence at 12:10 p.m. in London. Closing at that level would be the biggest one-day decline since May 2002. Before today the stock had gained 2.7 percent this year, trailing a 14 percent gain by the FTSE 100 index.
Profitability Decline
Vodafone said this year's profit margin, before interest, tax, depreciation and amortization, will be ``at the lower end'' of a range of ``flat to 1 percentage point lower.'' Next fiscal year, at businesses other than Japan, Vodafone forecast a ``slight decline'' in the profit margin as the company spends money signing up customers.
Net income at Vodafone in the six months ended Sept. 30 dropped to 2.78 billion pounds, or 4.35 pence a share, including a charge of 515 million pounds to exit Sweden, from 3.62 billion pounds, or 5.39 pence, a year earlier. Sales rose 9 percent to 18.3 billion pounds.
Mobile-phone revenue next fiscal year, including units Vodafone doesn't control, will be ``slightly lower'' than the 6 to 9 percent expected this year, Vodafone said. Sales grew 9 percent in fiscal 2005 and 11 percent in the previous 12 months.
Vodafone calls the measure, which excludes takeovers and exchange rate changes, ``the key growth indicator.''
Slowing expansion at the company has triggered investor demands for bigger dividends. Vodafone raised the first-half dividend 15 percent to 2.2 pence a share and boosted the company stock buyback share buyback this fiscal year by 2 billion pounds to 6.5 billion pounds.
Japan Unit
In the six months to September 2005, sales in Japan fell 5 percent and the Ebitda margin dropped 6 percentage points to 22 percent as Vodafone spent more to attract customers. At Vodafone's German and Italian units, the margins were 46 percent and 54 percent.
``Falling margins are very much part of turning the company around,'' Sarin, 51, told reporters on a call. ``You can't turn the company around without investing in customers.''
Sarin, who said his turnaround plan is ``on track,'' last year spent $4.4 billion buying out the Japanese unit. He said the Japanese margin would reach its lowest level next fiscal year.
``They must be seriously considering'' pulling out of Japan, said Christian Maher, an analyst at Investec Securities in London who dropped his ``buy'' rating on Vodafone.
Sarin said today the company is ``committed to Japan for the long term.''
Adding Customers
Vodafone has added fewer than 5,000 net customers in Japan in each of the last three months in a market that expanded monthly by between 200,000 and 300,000. Vodafone has fewer than 2 million subscribers in Japan's 39.3 million-strong market for high-speed wireless services.
Declining profitability prompted Vodafone last month to agree to sell its Swedish unit to Norway's Telenor ASA in a transaction valued at 1.04 billion euros ($1.2 billion). The deal, Vodafone's first asset sale in 2 1/2 years, might signal a readiness to exit Japan, analysts said.
Vodafone mostly owns businesses where it's ranked first or second in the market. In Japan, as in Sweden, Vodafone owns the third-ranked mobile-phone operator.
Acquisitions
In the last six months, Sarin has agreed to spend $7.4 billion on acquisitions, from South Africa to Eastern Europe and India, in an attempt to increase revenue.
``The strategy of the firm continues to be on investing in growth,'' Sarin said on the call. ``There may be one or two other countries in Asia that we are interested in.'' Africa and Eastern Europe are also targets for acquisitions, he said, declining to mention specific countries.
Vodafone this month agreed to pay as much as $2.4 billion for a further 15 percent of Vodacom Group Ltd. in South Africa. In October, Vodafone agreed to buy 10 percent of India's Bharti Tele-Ventures Ltd. for about $1.5 billion. Only 6 percent of India's 1.1 billion population owns a handset.
Vodafone reiterated plans to return to shareholders all the cash it generates in the year ending March 2006. Banks including Credit Suisse First Boston last week called for Vodafone to increase the proportion of earnings paid out in dividend to 50 percent.
Vodafone today said it will pay half its net income in dividends next fiscal year. Sarin had previously resisted devoting more cash to dividends to enable him to pounce on deals such as wresting control of French wireless business SFR from majority shareholder Vivendi Universal SA, said investors including Felix Lanters at Theodoor Gilissen Bankiers. Vivendi has said it's not selling.
European phone companies are indulging in their biggest spending spree since forking out $100 billion on wireless licenses at the start of the decade.
Spain's Telefonica SA last month agreed to buy British mobile-phone operator O2 Plc for 17.7 billion pounds. TDC A/S, worth about $11 billion on the Danish stock market, has said it has had takeover approaches. Last week Swisscom AG said it may buy Ireland's Eircom Group Plc, now worth $2.9 billion.
To contact the reporter on this story: Angus Whitley in London at awhitley1@bloomberg.net
Market Data 
Markets 
AI
