Vodafone Cuts Revenue Outlook as Downturn Bites

Mobile phone group Vodafone cut its revenue outlook, as tougher economic conditions forced consumers to hold back from buying and using new handsets, especially in Spain, knocking its shares to a 20-month low.

The move sent shares in the world's largest mobile phone company by revenue down over 14 percent on Tuesday, cast a shadow over outgoing Chief Executive Arun Sarin's last set of results and hit the European telecoms sector.

"This shatters the widespread perception that Vodafone will be defensive in a weakening economy," Investec analyst Jonathan Groocock said.

"This is going to trigger a derating and I'm going to be moving towards more defensive stocks."

Collins Stewart analyst Mark James said telecoms companies had shown remarkable resilience to date to the economic slowdown, but Vodafone had kicked off the telecoms results season with a reminder that nothing is immune.

"The Spanish and UK telecoms markets, resilient to the economic slowdown to date, finally look to have cracked," he said.

Vodafone posted first-quarter revenue in line with forecasts at 9.8 billion pounds ($19.57 billion) but said its full-year revenue was likely to be around the bottom of its previously forecast range of 39.9 billion pounds to 40.7 billion pounds.

The results will be the last for Sarin, who will be replaced on July 29 by his deputy Vittorio Colao after five years.

Sarin had spearheaded Vodafone's push into emerging markets to offset slowing growth in more mature European countries, but analysts questioned whether this would now be enough.

Analysts had previously said they expected any impact of a consumer slowdown to be modest in Europe for now, as Vodafone's exposure to the low-end consumer market remains relatively low.

Shares Hammered

Shares in Spanish telecoms group Telefonica opened 10 minutes late and down due to the Vodafone comments.

Vodafone was down, while the DJ Stoxx telecoms index was also down.

Sarin told reporters on a conference call that the group had been hit by the reduction in the number of economic migrants who had been working in Spain, often in the construction industry, and to a lesser degree in Britain and Ireland.

He said the slowdown in Spain's construction industry had also resulted in a reduction in the number of builders who used mobile broadband devices when working on sites.

"Whilst we expect revenue around the bottom of the outlook range, our continued focus on cost reduction enables us to reiterate our operating profit and cash flow guidance for the year, Sarin said." Vodafone added 8.5 million subscribers in the three months to the end of June, taking the company's proportionate customer base to around 269 million.

Vodafone has been seeking to accelerate pedestrian growth in its core European markets with greater exposure to emerging markets from its EMAPA businesses in eastern Europe, the Middle East and Africa, Asia Pacific and affiliates.

But Sarin said Vodafone had seen customers across all its territories increasingly buying just SIM cards to use in existing handsets to save the cost of buying a new device; however he added that this did not affect its margins.

"It's pretty much everywhere," he said.

"You can get SIM only for lower and that is the phenomenon that is occurring. Customers are finding ways to reduce their costs. They're doing the rational thing." Vodafone's push into emerging nations is being driven in Ghana and South Africa.

It has recently signed a deal to pay $900 million for a 70 percent stake in Ghana Telecom, the country's third-largest mobile phone operator.

It is also in talks with South Africa's Telkom over buying a further 12.5 percent stake in Vodacom, which is jointly owned by Vodafone and Telkom, for 18.75 billion rand.

Sarin declined to comment on the Telkom talks.