Vodafone Q2 FY19-20: Europe recovery drags at increasingly Germanic Region

Vodafone continued its long struggle to get all major cylinders firing in the Europe Region during the three months to 30 September 2019 (Q2 FY19–20), and there were some tentative hints the Group might be refining its outlook on its regional prospects and footprint.

Presenting results for the quarter, Group leadership painted the division as showing “continued improvement”. But if there was a recovery, it was bitty at best. Vodafone’s evidence for progress — a 40 basis points rise in service revenue trend — excluded regulatory impact; hardly a peripheral consideration in Europe’s awkward and fragmented business environment.

Much of Chief Executive (CEO) Nick Read’s commentary again focused on improvement of commercial indicators. While these reflect freshening-up of Vodafone’s go-to-market approach under his leadership, they have yet to transform the operator’s financial performance.

Can Group build muscle while fasting?

The Group’s long search for a consistent, “broad-based” growth platform in Europe goes on.

None of the Region’s four major OpCos achieved service revenue increases on an ‘organic’ basis (i.e. pro forma) in Q2. Overall, the quarter saw service revenue decline across the Europe Region by 1.4%, to €7.3bn (£6.2bn), with only the Other Europe collection of smaller country businesses achieving forward movement in sales (adding to their recent presentation as leaders of digital customer experience initiatives within Vodafone — Vodafonewatch, #167 and passim). Q2 saw the grouping overtake Vodafone Italy (VfIt) on service revenue contribution (€1.26bn versus €1.23bn), having already surpassed Vodafone Spain (VfS).

Adjusted earnings before interest, taxation, depreciation, and amortisation (EBITDA) slid 0.1% across the first six months of FY19 (H1 FY19).

With major OpCos continuing to splutter, there remained significant emphasis on Read and Chief Financial Officer Margherita Della Valle’s pet operating expense (opex) reduction and capital efficiency initiatives.

Vodafone said its latest, three‑year efficiencies push was on track, with a further €200m of their targeted €1.2bn Europe Region and Common Functions operating expenses savings achieved during H1 (Vodafonewatch, #170). This represented half of the fiscal year’s savings allocation. Further, there were hints of an even bigger, Germany‑ and UK‑focused savings drive being in the pipeline, following a benchmarking exercise (see separate report).

Tower-sharing and monetisation moves, and other potential asset sales, also infused the Q2 analyst session.

Bulked-up VfD: Düsseldorf’s gravitational pull increases further

At OpCo level, the results followed a similar pattern to previous quarters.

Q2’s addition of Liberty Global’s Unitymedia business to Vodafone Germany (VfD) added to the theme of Vodafone’s increasing German character and reliance (Vodafonewatch, #178) — especially when coupled with retrenchment elsewhere and the emerging prospect of a new phase of asset-cutting focused, this time, within the Group’s “Europe and Africa” core (see further on).

Despite VfD dropping into reverse gear, organically, on service revenue trend in Q2 (‑0.2%), the Unitymedia add‑on saw the OpCo increase its share of Europe Region sales to 37%, from 33% in Q1. VfD also produced 60% of the division’s operating free cash flow during H1 — despite being the only major regional business to increase capital expenditure (capex) in the period.

Previous to the results presentation, on a trip to VfD’s headquarters, Read deemed Germany the “engine of Europe” and gave only qualified backing to London as Vodafone’s existing corporate base, saying the UK “remains a very good place to have a global headquarters. Obviously, with Brexit I hope that remains the case”.

VfD’s top‑line reversal in Q2 was blamed on declining wholesale revenue and regulation, and Vodafone reassured over underlying trends at the OpCo, including the opportunity to boost revenue through cross-selling of Unitymedia services.

Rest still playing catchup

The onus on Germany was heightened by only creeping recovery at other major businesses:

• VodafoneZiggo continued a timely revival, coming with exit options due to start opening up for its parents in January 2020 (see separate report). The joint venture, which has struggled performance-wise since its creation, produced a second consecutive quarter of revenue growth (+0.8%), helped by a price increase implemented at the start of Q2.
• Vodafone UK (VfUK) achieved par on service revenue, extending a long run of insipid top-line performance. Read — who tonally, seems to see VfUK almost as a rising star — indicated the home-market business will return to growth during H2 FY19–20, and described it as “becoming a contributor to our overall Group growth story”. As in other Europe Region markets, commercial gains were said to be being driven by lower‑end sub‑brands (VOXI, in VfUK’s case), rather than legacy.
• VfS’ demise continued with a further, 8%-drop in service revenue. Della Valle again sought to portray VfS’ commercial performance as “stabilising”, with porting movements “essentially flat”, but noise is increasing about the Spanish business’ future within Vodafone (see below).
• In Italy, another long-time problem market, VfIt was described as “trending better”, with service revenue contraction decelerating to 3.2% from 3.8% in Q1. How the Italian market has changed for the worse for Vodafone was demonstrated by the ongoing disparity between VfIt’s data traffic (rapidly growing) and revenue (perpetually eroding). VfIt’s customers produced more than 400PB of data in Q2, putting VfIt into first place across all OpCos.