Vodafone to focus on cost control after revenue cut
Vodafone to focus on cost control after revenue cut
Vodafone announced a cost cut of £1bn due the rising price of raw material.

London: Mobile phone group Vodafone cut its full-year revenue outlook for the second time in four months on Tuesday but said it would maintain profits and boost free cash flow by cutting £1 billion ($1.6 billion) of costs.

Investors and analysts welcomed the focus on cost controls and on improving performance, instead of on growth by expansion, pushing shares in the world's largest mobile phone group up 9.5 per cent to 118.6 pence by 1125 GMT in a falling wider market.

Vodafone Group Plc, reporting its first set of figures under new Chief Executive Vittorio Colao, also reported first-half results that met expectations, but said conditions would be challenging. "Vodafone has delivered a more material change to strategy than we expected, with more of a focus on cash and dividend than there has been in the past," Dresdner analysts said in a note.

"This is a fundamental change which, when combined with earnings momentum from stable operations, lower tax rates and favourable foreign exchange rates, supports a good chance of a rerating for the stock," they said.

Vodafone now expects full-year group revenue to be between £38.8 billion and £39.7 billion. It had already cut its expectations in July to the bottom of a previous forecast range of £39.9 to £40.7 billion.

It slightly raised its free cash flow forecasts. "Operating conditions are expected to continue to be challenging in Europe, given ongoing competitive and regulatory pressures and recent economic conditions in certain markets," the group said.

"Whilst the current economic environment is also impacting emerging markets, increasing market penetration is expected to continue to result in overall strong growth for the EMAPA (emerging markets) region."

The group raised its interim dividend 3.2 per cent and said it would introduce a "progressive" dividend policy where growth reflects the underlying trading and cash performance.

First half revenue was slightly ahead of expectations, up 17.1 per cent at £19.9 billion, and core profit matched analysts' average forecast. Most analysts welcomed the results, though others noted that European revenues fell 1.1 per cent on an organic basis.

Vodafone said it remained comfortable with its liquidity and committed to its single A credit rating. "Given our credit rating and the current level of cash flow and dividends, this leaves limited debt capacity," it said.

"We expect to reduce current operating costs by approximately 1 billion pounds per year by the 2011 financial year to offset the pressures from cost inflation and the competitive environment and to enable investment in revenue growth opportunities."

Vodafone declined to say whether it would make job cuts but said it could look at outsourcing work to cut costs. Vodafone is rated A- by both Standard & Poor's and Fitch Ratings and Baa1 by Moody's Investors Service.

Vodafone said it had reviewed its strategy due to the more difficult economic environment and said it would focus on growing mobile data and on its execution in emerging markets. It will also focus on driving operational performance and strengthening capital discipline.

"We are already represented in most of the key emerging markets, where significant growth is expected in the coming years," it said. "Our principal focus now will be on execution in these markets."

Analysts at Cazenove said the new strategy made sense and others welcomed the suggestion that Vodafone would focus on its current markets rather than chase further acquisitions.

But Society Generale said investors should sell into strength and said the results benefited from favourable currency movements. "This is a large downgrade pre-currency and highlights the cyclicality of Vodafone," it said in a note.

Telecoms groups had previously been seen as resilient to a downturn, but so far this year the European telecoms shares have not done any better than the wider market.

Original news source

What's your reaction?

Comments

https://chuka-chuka.com/assets/images/user-avatar-s.jpg

0 comment

Write the first comment for this!