Vodafone: where next for the European telecoms giant?

This organic growth is being driven by investment in its fixed broadband capabilities, supplemented by new strategic partnerships across Europe in the UK, Portugal, Italy and Germany. It also acquired Liberty Global’s cable operations in Germany and Central and Eastern Europe in May, and has started to push its Internet of Things (IoT) business, capitalising on the growing amounts of connected smart devices in our homes.

Vodafone’s two ‘growth engines’ are mobile data, and its enterprise division that sees it supply IoT, cloud, hosting, mobile communications, fixed communications and unified communications to businesses.

Vodafone share price tumbles after 2017 annual results

Vodafone shares have fallen to their lowest level since late 2014 following the annual results, as shown in the following chart:

Vodafone growth engines: mobile data and enterprise

The world is using increasing amounts of mobile data. Vodafone’s data traffic soared over 60% in both Europe and its other division covering Africa, the Middle East and Asia Pacific. Vodafone has been investing to ensure it can deliver the speeds and the ability to handle peak periods of usage and says the success of this has been demonstrated by the improvement in its ‘Net Promoter Score’ (essentially a measurement of customer service and satisfaction out of 100), boasting a ‘leading or co-leading position in 14 out of 20 markets’.

Growth is also expected from its fixed broadband business that accounts for about a quarter of total revenue (and 29% in Europe), up from 22% three years ago. Vodafone expects to connect 50 million households within its European market to its Next-Generation-Network (NGN), a telecommunication packet that can handle multiple services like voice, data and multimedia. Vodafone sees the opportunity in NGN as a window to ‘capture substantial profitable market share’ and to enhance its convergence strategy by combining its fixed services with its mobile customer base. Having customers using multiple services also helps to reduce churn.

A big part of its overall ambitions involves bundling more products and services together as part of its convergence strategy, a tactic also being pursued by the likes of BT Group. Vodafone managed to add 754,000 customers by offering packages last year, with 4.5 million customers now using multiple Vodafone services.

Read more about BT Group and what’s next for the ‘complex and overweight’ telecoms giant

The enterprise division that caters to businesses generates about 29% of Vodafone’s revenue (and 31% in Europe). The firm is now looking to expand its established services offering mobile voice and data services by moving into areas like IoT, cloud and hosting and other growth markets.

Vodafone: growth coming from Vodacom and Germany

Vodafone has 16.1 million broadband customers, 9.9 million of which receive a high-speed service over fibre and cable lines. It has an additional 9.9 million television customers. That also excludes the deconsolidated Dutch joint venture VodafoneZiggo, which itself has 3.3 million broadband customers and 3.9 million TV customers, with one million customers using multiple services.

In Germany, Vodafone has committed to the ‘Gigabit Investment Plan’ that will see an additional €2 billion invested on its ultrafast broadband services by the end of December 2021. While the move should provide solid incremental growth and returns, Vodafone expects cash flow to experience a minimum impact through its partnership model. Around 2000 business parks in Germany will be hooked up to fibre across Germany in this timeframe, in addition to one million rural households. About 12.7 million existing customers will also see their broadband speeds increase.

In Portugal, Vodafone has struck a partnership to gain access to a further 1.3 million homes and businesses, giving it an addressable market in the country of about four million, or 80% of all households.

In Italy, Vodafone expanded its existing partnership with Open Fiber. Vodafone only provided coverage in 13 cities before announcing in April that this was growing to 271 cities, which will give it access to about 9.5 million homes, or 60% of the population.

In the UK, Vodafone struck a long-term partnership with CityFibre Infrastructure Holdings, an alternative provider of wholesale full-fibre networks. This deal allows Vodafone to market its fibre-to-the-home services to up to five million households by 2025. Vodafone claims it has identified where the first one million new households will be built in the country with initial targets in Milton Keynes, Aberdeen and Peterborough.

The most recent deal that Vodafone struck was in May with its purchase of Liberty Global’s cable assets in Germany, the Czech Republic, Hungary and Romania for €18.4 billion. The deal is significant for the firm as it allowed it to create a company equipped with enough services to encourage convergence among its customers, and one fit to be a ‘national challenger’ to the leader in Germany, Deutsche Telekom. It also adds more services to its Central and Eastern European operations, which are currently concentrated on mobile-only services. However, it will add about €3 billion of debt to its existing pile.

Vodafone’s expansion forms part of its wider ‘Digital Vodafone’ programme that is focused on capitalising on the digitisation of business, both for itself and its customers. This plan is the next step that builds on its successful ‘Fit for Growth’ programme that lowered operating costs on an organic basis for the second year in a row in 2017, playing a role in the company’s earnings growth amid subdued revenue growth. This reduction in costs is anticipated to continue this year.

Vodafone and Idea Cellular merger opens up growing market in India

‘We have made good progress in securing approvals for the merger with Idea Cellular in India – which is expected to close imminently – and appointed the new management team, who will focus immediately on capturing the sizeable cost synergies,’ – Vodafone.

Vodafone’s Indian operations reported a sharp downturn in earnings and revenue in 2017 as aggressive new competition continued to take its toll. However, last year it struck a deal to merge Vodafone India with rival Idea Cellular to yield cost and revenue synergies and to better position itself to compete. The merger excludes its 42% share of Indus Towers, which is being merged with Bharti Infratel to give Vodafone a controlling stake in India’s largest listed tower company.

Vodafone 2019 earnings guidance: investment to drag on profit and cash flow

‘We expect to sustain our profit growth in the year ahead, despite the arrival of a new entrant in Italy and competitive pressure in Spain, supported by the third year in a row of lower net operating costs. Our primary focus continues to be to accelerate the ‘Digital Vodafone’ programme, which we believe is a unique opportunity to enhance our customers’ experience, generate incremental value and improve cost efficiency,’ – chief executive Vittorio Colao, May 2018.

The company outperformed its guidance in the recently-ended financial year, beating its own adjusted EBITDA targets and its goal for free cash flow. For the 2019 financial year, Vodafone expects to deliver organic growth in adjusted EBITDA of 1% to 5%, considerably slower than the near 12% growth reported for 2017.

Vodafone expects free cash flow (pre-Spectrum auction) of ‘at least’ €5.2 billion this year. The anticipated drop in cash flow is partly because of the added spending as part of its Gigabit Investment Plan in Germany, which will cause an annual drag of €100-€200 million in the ‘initial years’. A further €200 million will be lost from its exit from Qatar and the shake-up of shareholding in its Indian arm.