Vodafone looks to cut £1 billion costs as net profit falls 35%

Vodafone is seeking to cut operating costs by £1 billion a year by 2011, as it trims its 2008 revenue forecast by £1 billion, as it focuses on consolidating existing markets and fresh revenue streams, bracing for an economic slowdown.

Vodafone is seeking to cut operating costs by £1 billion ($1.58 billion) a year by 2011, as it warns full year revenues could fall by up to £1 billion in 2008. The UK telecoms giant has announced a 35% drop in net profit for the first half of the financial year, at £2.14 billion down, from £3.29 billion in the period 1 April to 30 September 2007 year on year. Revenue for the same period rose 17.1% to £19.9 billion, from £17 billion during the first half of financial year 2007 year on year, while EBITDA for the group rose 10.3% to £7.2 billion, from £6.6 billion in the same period 2007 year on year. Profit in the latest period was hit by a £1.7 billion impairment loss on Vodafone Turkey.

The world’s largest telecoms group issued a warning that revenues for 2008 would now fall within the £38.8 billion to £39.7 billion range, down from a previous forecast of between £39.9 billion and £40.7 billion, as it embarked on a fresh strategy and cost cutting drive.

Global Insight telecoms analyst, Peter Boyland, said that despite the growth in Vodafone’s other regions, Europe is still the company’s core market and contributed a big chunk of the group’s revenue. In the group’s European markets, sales excluding currency swings and acquisitions dropped 1.1%, as growth in data services didn’t make up for declining voice and SMS use, reflecting a general stagnation across Vodafone’s traditional customer base, said Boyland.

However, Vodafone has recently re-jigged its operations across the region and is offering fixed and mobile services in most of its leading markets, and revenues were slightly propped up by favourable currency movements in the dollar, euro, and pound sterling, continued Boyland. Meanwhile, Vodafone continues to resist European Union (EU) reforms in its traditional European markets, and the threat of enforced cuts to mobile termination rates and other tariffs could hit the group hard, given its significant presence in the bloc.

Group CEO, Vittorio Colao, who took charge at Vodafone in July, following the exit of Arun Sarin, denied the persistent speculation that Vodafone might consider selling off its 50% share in Verizon Wireless in the US, saying that he preferred to concentrate on creating value from the Verizon stake, and that Vodafone would prefer to pursue new deals in existing markets. However, Boyland stated he did not rule out any unit divestments, saying the group would be prepared to sell off existing assets to fund growth if the right opportunity arose.

These announcements mark the first big test for Colao, explained Boyland. Vodafone has announced plans to pursue a new strategy of trying to give its customers what they want rather than chasing revenue growth. Colao said: “Our updated strategy reflects the changing economic and market conditions and it will drive execution with a continuing focus on free cashflow.”

Vodafone has now announced it will concentrate on three key revenue areas: mobile data, enterprise and broadband, shifting its approach away from unit pricing and unit-based tariffs to these areas, hoping to deliver more customer value to generate greater subscriber commitment.

Vodafone aims to cut operating costs by £1 billion a year by 2011, as it focuses on consolidating existing markets and braces for an economic slowdown.

Recently, a significant geographic reorganisation of the Vodafone Group’s EMAPA region will see the unit split into two new regional divisions from 1 January 2009, managed as a Central Europe/Africa regional division and an Asia/Pacific region. Boyland said this is increasingly necessary, as Vodafone commits to heavy expansion in the African market, where it has negotiated a controlling stake of South Africa’s Vodacom. Vodafone has also acquired a controlling stake in India’s Hutchinson Essar.

Although this is currently facing a case over capital-gains taxes, the company now has some 51 million subscribers at the end of July. Vodafone added 1.76 million subscribers in that month alone; this rapid growth exemplifying the reasoning behind the buyout. As its traditional European markets stagnate, Vodafone will be forced to rely increasingly on its new markets to remain the world’s top operator, but these markets are far from secure, Boyland warned.

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