We all have a broad idea of what the companies in our portfolios do. But how much do you really know about their products and their markets, or how much each of their activities contributes to the bottom line? Understanding how a company makes its money can help you decide whether it’s a good investment.
The make-up of profits at Vodafone (LSE: VOD) (NASDAQ: VOD.US) is changing. The big payouts from Verizon Wireless that have fuelled Vodafone’s own dividends will be no more. The company has bought Kabel Deutschland and has a war chest for further acquisitions alongside its £7bn capex budget for Project Spring. What will the new Vodafone’s business look like?
Bundling
The three themes of its Vodafone 2015 strategy were data, enterprise and emerging markets. Already 60% of mobile revenues come from contracts that bundle data and traditional voice/text together. But this is now overlaid with the theme of unified communications: combining some or all of mobile and fixed-line telephone, internet broadband and television. Vodafone has said it will ‘build, borrow or buy’ the fixed line infrastructure to provide unified communication.
Three-quarters of the company’s fiscal 2013 revenues came from mobile services. However, mobile revenues are under pressure from regulators seeking to reduce mobile termination rates and overseas roaming charges which together made up 13% of service revenues in 2013.
Enterprise
Vodafone’s enterprise business is roughly split into global enterprises, SMEs and Machine-to-machine (M2M) solutions. Global enterprises typically outsource their mobile phone requirements as a managed solution. SMEs are moving to bundled services much like the retail market. M2M includes applications such as chips on lorry fleets providing constant data.
Geographically, Vodafone has reorganised to combine its Northern and Southern Europe divisions, transferring Turkey to the faster-growing Asia, Middle East and Pacific division. It makes a cleaner distinction between developed and emerging markets.
Within Europe, Vodafone is market leader in both Germany and Italy, with around a 35% market share and roughly 30m customers in each. The company has a 25% market share in the UK with 20m customers.
Emerging markets
Around 30% of revenues come from emerging markets, but the vastly greater number of customers points to the growth potential.
Vodafone has 150m customers in India, where it has one-fifth of the market. Through its 65% owned subsidiary Vodacom, the company has 60m customers in Africa. Emerging market growth is expected to come from growing populations, increasing mobile phone use and increasing smart phone penetration, especially given the lack of fixed line infrastructure.
