3rd UPDATE: Vodafone Doubles Cost Saving Target, 1st Half Profit
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By Lilly Vitorovich
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Vodafone Group PLC (VOD) Tuesday doubled its cost saving
target to GBP2 billion to help combat sluggish demand during the economic
downturn as the world's biggest mobile operator posted a rise in first-half
earnings and confirmed its full year guidance.
Chief Executive Vittorio Colao said the group's GBP1 billion cost reduction
program is expected to be delivered a year ahead of plan, and will be extended
by an additional GBP1 billion by 2012, double the amount analysts had been
expecting.
"At the same time, we have maintained our capital investment at GBP2.6 billion
in the first half, delivering further improvements in network quality and
performance for our customers," he said.
"We will continue our focus on the delivery of our growth strategy,
particularly in data services," Colao added.
Since taking the helm in July 2008, Colao has turned his attention to cash
generation and shareholder returns by developing the U.K.-based group's high-
growth operations in Asia, Africa and central Europe.
Vodafone said Tuesday that sterling's fall against a range of currencies
including the dollar, and its minority stake in Verizon Wireless in the U.S.,
helped to offset continued weakness in Europe. Verizon Wireless, majority owned
by Verizon Communications Inc. (VZ), contributed 34% to adjusted operating
profit.
First-half net profit more than doubled to GBP4.82 billion, from GBP2.14
billion a year ago, driven by higher revenue and lower financing costs and
income tax expenses. The year ago figure was marred by a GBP1.7 billion
impairment loss.
Revenue rose 9.3% to GBP21.76 billion, from GBP19.90 billion a year ago and
just ahead of analysts' expectations of GBP21.71 billion.
Earnings before interest, tax, depreciation and amortization, the key figure
tracked by U.K. analysts, rose 2.9% to GBP7.46 billion for the six months ended
Sept. 30, buoyed by currency gains and cost cutting, but below market
expectations of GBP7.58 billion. That compares with GBP7.24 billion over the
same period a year earlier.
Vodafone generates around 7% of Ebitda in the U.K., and the rest from its
international operations.
On an organic basis, stripping out acquisitions, disposals and currency
movements, Ebitda fell 7.9% largely because of its underperforming operations in
Europe, while revenue was down 3%.
Free cash flow before licence and spectrum payments rose 29% to GBP4.00
billion in the first-half of fiscal 2010 from GBP3.10 billion a year ago.
Vodafone expects full year adjusted operating profit to come within the range
of GBP11.0 billion to GBP11.8 billion, and free cash flow, excluding licence and
spectrum payments, around the upper end of GBP6 billion to GBP6.5 billion range.
Like rivals, Vodafone faces declining revenue in mature markets due to
heightened competition and new regulation. It faces similar pressures in
emerging markets like India and South Africa, although these remain growth
areas. It is the latest major telecommunications company to reiterate guidance
by means of cost cutting, following Deutsche Telekom (DT), France Telecom (FTE)
and others.
The additional GBP1 billion of costs savings will come from technology,
commercial and general and administrative operations, and is expected to result
in job cuts Colao said, without providing further details. In February, Vodafone
cut 500 U.K. jobs.
In Europe, Vodafone's biggest market by revenue, there are some signs of
stabilization, Colao said. Vodafone saw usage growth stabilize in the fiscal
second quarter compared with the previous quarter as slightly more handsets were
sold. A sales decline of 7.5% in Spain was an improvement from the 8.7% fall in
the first quarter.
In Turkey, where the company has struggled, revenue declines also slowed.
India, meanwhile, remains attractive, but "the competitive intensity will
remain there until consolidation", Colao said.
Vodafone's cost savings increase was expected, but "pleasing" nonetheless,
said ING analyst Lawrence Sugarman, who has a buy rating on Vodafone and 165
pence target price. Sugarman said the company's operational performance was in
line, but cash flow was a little better.
However, some analysts were disappointed with the group's Ebitda margin
decline of 2.1 percentage points in the first half due to pressures in emerging
markets, including the more competitive environment in India and recent flooding
in Turkey. Vodafone expects its full year Ebitda margin to fall by a similar
rate to the first half, compared with a 1.8 percentage points fall in fiscal
2009.
At 1448 GMT, Vodafone shares were down 3 pence, or 2.4%, at 135 pence in a
broadly flat London blue-chip market. The stock has fallen 4.2% since January
on concerns about slowing growth.
Vodafone declared an interim dividend of 2.66 pence a share, up 3.5% from a
year ago.
-By Lilly Vitorovich, Dow Jones Newswires; 44-0-207 842 9290;
lilly.vitorovich@dowjones.com
(END) Dow Jones Newswires
11-10-091007ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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