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3rd UPDATE: Vodafone Doubles Cost Saving Target, 1st Half Profit Up

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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
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