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Vodafone - 2,700 jobs cut, full-year guidance maintained

Vodafone reported half-year revenue of €21.9bn, up 3.2% on an organic basis as annual price hikes came into effect...

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Vodafone reported half-year revenue of €21.9bn, up 3.2% on an organic basis as annual price hikes came into effect and helped offset falling customer numbers in some areas of the business. This growth figure strips out the impact of its Vantage Towers, Hungary and Ghana business disposals in the prior year.

Underlying cash profit was up 0.3% to €6.4bn, growing at a slower pace than revenue due to "significant" increases in energy costs.

Free cash outflows improved from €3.2bn to €2.0bn year-on-year. Net debt came in at €36.2bn, an increase of €2.9bn over the first half.

Full-year guidance has been maintained, with the group expecting to generate underlying cash profits of around €13.3bn. There was a 2,700 reduction in headcount over the first half, in line with the previously announced plan to trim 11,000 roles.

An interim dividend of 4.5 eurocents has been announced, in line with last year.

The shares fell 1.5% following the announcement.

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Our view

Vodafone's transformation into a more streamlined and consumer-focused business is gaining pace, with several disposals now complete and more potentially on the cards. Annual price hikes have helped to offset stumbling customer numbers, and flattered first-half 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. There are job cuts, the merger of its UK business with Three UK, and the recently agreed sale of the underperforming Spanish division. There are reports that its Italian division could be next in line to be offloaded but nothing has been confirmed yet. All this is an attempt to streamline the business and allow focus in areas like Vodafone Business that offer the most potential.

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 EUR20bn 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-to-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 rose to EUR36.2bn over the first half, which is a little lofty for our liking. And while operating cash flow is stable, cash demands remain high. Free cash flow for the current year is expected to cover dividend payments. But we're expecting a review of the capital allocation policy next year and given the current lofty dividend yield, we wouldn't be surprised to see dividends get cut back. Remember, no dividends are guaranteed.

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 14th November 2023