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For the last few years Vodafone's results have always been confused by the large number of acquisitions undertaken by the company. There are signs that this stage of its growth is coming to an end now that the major 3G licences have been awarded. But these results still bear the legacy of confusion. Perhaps it's best to set the scene by illustrating where Vodafone's customers are located.
Country Operation Stake Proportionate
Customers (m)
Germany D2 99.2% 16.4
US Verizon Wireless 45.0% 11.2
Italy Omnitel 76.1% 10.3
UK Vodafone 100.0% 10.2
France SFR 31.9% 2.8
Japan J-Phone 25.0% 2.2
Netherlands Libertel 70.0% 2.1
Australia Vodafone 91.0% 1.6
Spain Airtel 21.7% 1.4
South Africa Vodacom 31.5% 1.2
Others 6.1
Total 65.5
It's clear that Vodafone's customer base is dominated by just four countries. These account for almost 75% of its customers. The top ten countries account for over 90%. Vodafone's most noticeable weaknesses are Latin America and Asia. However, it is taking steps to redress this. A 2% stake in China Mobile was acquired recently at a cost of $2.5b. Vodafone's US operations could also do with some care and attention. The customer churn rate at Verizon Wireless (which has swallowed Vodafone's Airtouch subsidiary) is an absurdly high 30%.
Today's figures
Operating profits came in at £2.3b, a 19% increase over last year after adjusting for the impact of the all the acquisitions and disposals that have taken place. Profit growth is expected to accelerate in the second half of this year. It was actually held back by rapid customer growth in Germany that had a short-term impact on profits due to the costs of acquiring and connecting customers. This led to German operating margins falling from 45% to 30%. However, considering that the group's overall margins are over 32% this doesn't look too significant. Customer growth in Germany was an incredible 49% in the last six months and churn has also been reduced significantly to 10%. D2 was the first German operator to offer Internet and GPRS services and it expects to offer 3G services from 2002.
Overall group margins declined from 34.6% to 32.2%. Due to increased competition this is a trend that is likely to continue. Although Vodafone's position looks more secure than the other major players this is still the major doubt hanging over the valuation of the business.
The shift from voice to data services such as SMS is taking longer in the mobile world than elsewhere in the telecoms market. Data services accounted for 5.5% of Vodafone's revenue per customer although this is expected to increase rapidly over the coming years. Some analysts estimate that as much as 60% of revenues could come from data within 7 years.
One number to keep an eye on is ARPU (average revenue per user). Now that most of the high-value customers have been acquired in the major markets the focus is more on driving up the cash squeezed from each one, rather than acquiring new ones. The majority of newer customers are prepaid. In the UK the ARPU for prepaid customers is £165 but it is £421, over two and over half times greater, for contract customers.
How Much Debt?
Vodafone's debt currently stands at £13.2b. At first sight it would appear to have a similar problem to British Telecommunications (LSE: BT.A). However Vodafone has paid for its major 3G licences and it much closer to collecting cash from disposals than BT. Vodafone's debt levels are expected to decrease significantly over the next six months. BT's are expected to increase slightly by the end of 2001.
Branding
One part of today's announcement that caught my eye was the news that from January of next year the Vodafone brand name will appear alongside the name of the company's other brand names. This is the first step towards a global brand. However, it's unclear how long this process will take and there were no details on common pricing which would enable users to pay the same rate on their calls both at home and abroad. This is seen as a key move in attracting and retaining business customers, traditionally the most profitable area of the market.
Vizzavi
Vizzavi is Vodafone's 50/50 joint venture with Vivendi. Essentially it is looking to be the Yahoo (Nasdaq: YHOO) of the mobile Internet. It has only recently opened its doors so it is far too early to judge its progress to date. So far it is up and running in the UK, Netherlands and France. Germany and Italy are to be added by the end of the year. It's a bold venture and the jury is still out as to whether it will account for a significant element of Vodafone's earnings in future years.
Summing up
So where does all this news leave the average Vodafone shareholder? It is still a richly valued company trading on an estimated price to earnings ratio of 45 for the year ending March 2002. Those earnings estimates may be bumped up following these figures but the rich valuation will remain.
But compare Vodafone's recent performance with that of BT. Vodafone looks focused and in control whilst BT is sat on its backside scratching its head in bemusement. Vodafone is the leading operator in one of the most attractive industries of this decade. As long as it keeps its number one slot it remains a solid investment.
Where Next?
• Vodafone discussion board
• Results in full
• Wireless. And the answer is...