Vodafone's third quarter revenue fell 6.8% to EUR11bn. However, strip out foreign exchange movements, asset sales and accounting changes, and organic service revenue rose 0.1%.
That's behind growth of 0.5% in Q2, but Vodafone has left guidance for underlying organic adjusted EBITDA growth of c.3% and pre-spectrum free cash flow of EUR5.4bn unchanged.
The shares were marginally lower on the morning of the news.
Vodafone used to be more about the growth potential of India and emerging markets than its European operations.
Recent deals, to buy Central and Eastern European assets from Liberty Global and deconsolidate the Indian business, change all that. The Liberty deal is Vodafone's biggest for 18 years, and, should it go through, would mean Europe becomes responsible for over 75% of group profits.
As well as shifting geographic focus, the deal could help Vodafone address a couple of issues.
The first is the significant fixed costs of running a telecoms business. The cost of infrastructure and mobile spectrum is huge. Vodafone says the extra scale would mean EUR535m a year in operating and capital expenditures savings are possible within 5 years of the deal completing.
The second is that despite all the investment in the upkeep of the network, there's not much differentiating providers other than the price they charge. Customers often just go with the cheapest deal. This problem was recently illustrated in India, where a new rival undercut the group leading to billions of dollars in write-downs.
To counter the lack of pricing power, Vodafone's been rolling out broadband, fixed line and TV services across its European markets to sit alongside its existing mobile offer.
Early indications are that the tactic is working, and customer retention is significantly better among customers taking up multiple products. Adding millions of extra broadband customers through the Liberty deal opens the door to even more cross-selling opportunities too.
The group expects the cost of integrating the two businesses to be around EUR1.2bn. The risks associated with that can't be ignored, especially since net debt will tick up towards the top end of the target range.
That has implications for the dividend. Selling the towers business could ease the debt burden, but the group will need to prioritise restoring order to its balance sheet over significant dividend increases.
Despite the lack of meaningful growth potential, the prospective yield of 8.8% will likely turn heads. But investors should remember Vodafone's free cash flow hasn't always covered the dividend. That's not sustainable in the longer-term, and there's no guarantee the Liberty deal will solve the problem.
Third quarter trading details
European revenue fell 1.6% to EUR8.5bn. Service revenue was EUR7.5bn, with Vodafone reporting a 1.1% underlying decline, the same rate as in Q2.
Competition in Spain and Italy, plus the decision not to renew Spanish football rights, means trends in these markets remain negative. However, Vodafone says both markets are stabilising. On the other hand, while underlying sales in the UK and Germany were both marginally ahead of last year, the rate of growth is slightly weaker.
The group has also announced its intention to extend existing network sharing agreements with Telefonica O2 in the UK to include 5G services, and then explore its options to 'monetise' CTIL. That's a 50:50 UK tower infrastructure joint venture.
Across the Rest of the World, revenue fell 9.6% to EUR2.6bn, driven by foreign exchange movements and the disposal of Vodafone Qatar. Underlying service revenue grew 4.9%. That's below the 7.7% reported in Q2, and reflects weak data revenue growth in South Africa offset by good growth in Turkey and Egypt.
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