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UPDATE 2-Vodafone confident on revenue outlook after tough quarter

Kate Holton and Paul Sandle
Thursday, 6 Feb 2014 | 5:03 AM ET

LONDON, Feb 6 (Reuters) - Britain's Vodafone said it was confident a growing number of customers and the take-up of faster 4G services would help lift its revenue, after reporting yet another poor quarter due to fierce competition in Europe.

The world's second-largest mobile operator has reported sharp falls in organic service revenue in the last 18 months, due also to regulator-imposed price cuts and European consumers reducing the number of calls they make during the economic downturn.

The company, which is investing to improve the speed and coverage of its networks after selling its U.S. arm in a $130 billion deal, said organic service revenue was down 4.8 percent in the three months to the end of December, year-on-year.

That was in line with forecasts and followed a 4.9 percent drop in the previous quarter.

The company, second only to China Mobile globally in terms of subscribers and Britain's third-largest company by market capitalisation, also confirmed its full-year outlook.

Thursday's trading update showed quarterly organic service revenue - which strips out items such as handset sales, currency and acquisitions - was down 9.6 percent in its larger European division, which accounts for a third of the firm's revenue.

It was up 5.5 percent in its faster growing emerging market division of Africa, Middle East and Asia Pacific.

"In Europe, conditions are still difficult, and we continue to mitigate these challenges through ongoing improvements to our operating model and cost efficiency," Chief Executive Vittorio Colao said.

"In addition, the shift to 4G is gaining momentum and we have seen improving mobile customer net addition trends. We are therefore optimistic that our revenue performance will begin to improve as regulatory headwinds ease and customer appetite for video and content services increases."

In order to improve its offering, Colao said the group was in talks with several local content providers, which could mirror the deals it did in Britain where it offers a music service or sports clips with its faster 4G offering.

INTENSE PRESSURE

Vodafone described the pressures in Europe, where it competes with the likes of Telefonica, Orange and Deutsche Telekom, as intense.

That fits with the only other trading updates given so far for this quarter by the big telecom groups, with Nordic operator TeliaSonera posting quarterly profit below expectations due to weak trading in its developed markets.

Dutch telecoms group KPN also reported weaker-than-expected quarterly profits earlier this week, as frugal consumers and stiff competition hit its mobile division.

For Vodafone, service revenue in its biggest European market Germany was down 7.9 percent, while it fell by 5.1 percent in Britain and by 16.6 percent in Italy.

Despite the relentless pressures on the business in the core European markets, shares in Vodafone have rallied in the last year as it negotiated the sale of its 45 percent stake in U.S. operator Verizon Wireless.

With the deal due to complete at the end of February, Vodafone has itself been seen as a takeover target. But the most likely candidate AT&T was forced last month by the takeover panel to reveal its intentions, and said it had no plans to buy Vodafone in the next six months.

Vodafone's shares have fallen by 7 percent since that announcement, but sector bankers and analysts do expect the U.S. group, which has spoken openly about its interest in Europe, to return at some point.

Vodafone shares were trading up 1.6 percent at 219.4 pence at 0925 GMT, compared with a 0.3 percent rise in the FTSE 100 and a 1.3 percent rise in the European telecoms index .

Analysts at Espirito Santo Investment Bank said Vodafone's European performance was slightly lower than expected, dragged down by a disappointing organic revenue growth in Germany, although the company was gaining traction in adding new customers in the country. Its emerging market result, however, was slightly better than consensus.

"We think Vodafone's Q3 report is therefore OK and perhaps the shares could see a relief rally today post KPN's poor Q4 and guidance earlier this week," they said.

With the U.S. arm sold, Vodafone's exposure to emerging markets has also increased. The British group is present in markets such as South Africa, Turkey and India, which have all been hit by falls in their currencies in recent weeks.

Colao said the recent turmoil in emerging markets had shown that the group's cautious approach to expansion had been the right move, but that with mobile services remaining a basic need, he remained confident in the future of those markets where they operate.

Finance director Andy Halford said the group had not changed the way they hedged their currencies following the sharp falls.

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