Shares in Vodafone (LSE: VOD) have jumped by as much as 4% this morning after the company served up a set of consensus-beating half-year results.
The group reported that organic service revenue ticked higher by 1.2% during the second quarter, beating the 0.8% increase forecast by City analysts. What’s more, Vodafone hiked its full-year earnings before interest, tax, depreciation, and amortisation (EBITDA) guidance to between £11.7bn and £12.0bn.
But aside from these relatively upbeat headline figures, Vodafone’s half-year report was pretty mixed. Pre-tax profit for the six months to September 30 came in at £232m, down from the £406m reported for the same period last year. EBITDA for the half fell 1.7% year-on-year to £5.8bn, but after excluding the effects of currency, mergers and acquisitions, EBITDA rose 1.9%.
Overall group revenue fell to £20.3bn, down 2.3% year-on-year. On an organic basis, however (excluding the effects of currency, mergers and acquisitions), overall group revenue increased 2.8%.
Broken down by region, European revenue fell the most, down 6.2% on a headline basis most thanks to a weak euro. On an organic basis, European revenue ticked lower by 1.3%. Vodafone’s headline service revenue from its Africa, Middle East and Asia Pacific businesses rose 1.8% year-on-year or 6.4% on an organic basis.
Commenting on the results Vittorio Colao, Vodafone’s chief executive, said: “We have reached an important turning point for the group with a return to organic growth in service revenue and EBITDA in the first half of the financial year.”
Turning point
After years of lacklustre performance, today’s results from Vodafone do seem to show that the group is returning to growth. Service revenue is beginning to expand once again, and it looks as if the group’s expensive infrastructure programme is starting to pay off.
Indeed, Vodafone’s 1.9% organic EBITDA growth for the first half compares to a drop of 10% in the same period last year. Vodafone’s EBITDA margin also increased by 0.2% year-on-year as customers have started to take up higher margin services.
And now that spending on Project Spring — Vodafone’s two-year multi-billion pound European investment programme — is beginning to wind down, management expects the group to report a positive free cash flow this year. Vodafone defines free cash flow as cash flow from operations after deducting all capex, but before the impact of M&A, spectrum purchases and restructuring costs.
Vodafone is on track to generate around £9bn in cash from operations this year. This means that the company’s dividend payout to investors, which currently totals just over £3bn per annum, is covered several times by cash generated from operations.
Making progress
All in all, today’s results from Vodafone show that the company’s investment programme is really starting to pay off. Investors should soon be able to reap the benefits.
When Vodafone’s Project Spring is finally complete, the company will be able to use its substantial free cash flow to pay down debt and increase returns to shareholders.
Vodafone’s shares currently support a dividend yield of 5.2% and trade at a forward P/E of 46.
