Vodafone reported total revenue of €10.7bn over the first quarter, reflecting organic growth of 3.7%.
Germany and Italy saw service revenue decline 1.3% and 1.6% respectively, though declines were lower than in the prior quarter. Higher broadband prices were the key driver of the improved trend in Germany, while Italy saw stabilising mobile customer levels.
The UK, along with operations in Africa, were the key drivers of growth. In both regions, the combination of higher prices and an increase in customer numbers helped performance. The deal to merge Vodafone UK with Three UK is in progress, expected to complete by the end of 2024.
The Group still expects to deliver underlying cash profit (EBITDAaL) of €13.3bn and underlying free cash flow of €3.3bn over the full year.
The shares rose 2.7% in early trading.
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Our view
The transformation at Vodafone is in its infancy, and there's a long way to go - but tentative signs of green shoots are emerging.
Price hikes are starting to feed through in a few areas of the business, helping service revenue performance. But these are temporary measures, and the wider issues associated with recent lacklustre performance need addressing.
Sales in the telecom sector should be relatively robust, as broadband and mobile services are hardly optional. Yet, over the last ten years, telecom giants have had to pump huge sums of cash into building out fibre networks and snapping up parts of the 5G spectrum. The main challenge has been the low sales growth relative to spending when you look at telecoms compared to other sectors.
Vodafone's not only had the structural headwinds to battle, but it's also been underperforming versus peers on a relative level. Service revenue growth and customer satisfaction in key areas like Germany, Italy and Spain have struggled to keep pace with peers.
In response, Vodafone has an evolved strategy. Initiatives include cutting around 11,000 jobs over the next three years, streamlining operations and focusing on growing the Vodafone Business division which has continued to perform well.
We welcome the change, but there's a lot to do.
The key market of Germany is a perfect example of the challenges at hand. After more than €20bn of investment, service revenue and customer numbers are moving in the wrong direction. IT systems have been slow to adapt to new regulation, and network performance continues to lag competitors. A new management team in Germany is in place, which we support, it now needs to deliver more than just price hikes.
Outside Europe, the Vodacom subsidiary has some exciting growth opportunities in Africa and is targeting mid-high single digit cash profit growth over the next few years. Africa could become increasingly important as the region develops, and Vodafone's leading position in several markets means it's well positioned to benefit.
Net debt, which was €33.4bn last we heard, sits in a range the new CEO says she's comfortable with. For us, it's still a little lofty and, while operating cash flow is stable, cash demands are high. Free cash flow for the new year is expected to currently cover the dividend payments, but when prospective forward yields are around 9.6%, caution is advised. Remember, no dividends are guaranteed.
The merger of Vodafone's UK arm with Three UK is progressing, expected to complete by the end of 2024. We remain supportive of the deal, which will create a dominant player in the market.
All-in-all then, while we think the portfolio changes and new strategy make sense, the fundamental challenges that go with being a telecom remain. And with growth hard to come by, we'll need to see sustained positive progress before getting too excited.
Vodafone key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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