Vodafone takes a hit following its latest update

<p>Shares of Vodafone declined around 5.5% (at time of writing) following the release of its full-year results. For its full year ended 31st March, the […]</p>

Shares of Vodafone declined around 5.5% (at time of writing) following the release of its full-year results.

For its full year ended 31st March, the company reported group revenue of some £44bn, marking a 1.9% decline year-on-year; with EBITDA coming in at around £12.8bn, down from some £13.6bn in the prior year.

The company posted profit for the year, however, at some £59bn – thanks mainly to proceeds from the sale of its 45% stake in Verizon Wireless.

So what is it that’s not sitting well with investors?

While Vodafone’s operations in emerging markets are faring relatively well, Europe remains a challenge – forcing the company to take a notable £6.6bn impairment charge on its operations in Germany, Spain, Portugal, Czech Republic and Romania.

Meanwhile, partly as a result of adverse currency movement, Vodafone forecasts fiscal 2015 EBITDA to be in the range of £11.4bn and £11.9bn, which is a decline and lower than expected.

Additionally, the company’s free cash flow is set to feel the heat from a ramp up in investments, with capital expenditure (capex) expected to be around £19bn over the next two years.

Elsewhere, recent news flow has dampened hopes of the company being an acquisition target, given AT&T’s current distraction.

Is the current reaction a bit dramatic?

Well, not really. It’s true that growth in its core European markets has proved elusive for Vodafone, and the company has continued to mount up its write-downs (last year for instance, it took a £7.7bn impairment charge relating to its businesses in Italy and Spain).

Despite efforts by the company to control costs, Vodafone’s profit margins have been trending downwards.

Indeed, its recent performance, together with its outlook, is enough give investors pause for thought.

But the challenges faced by Vodafone in certain areas in Europe aren’t entirely unique

Other telecoms operators haven’t exactly been cracking open the bottles of champagne on account of great success in Europe over recent years.

Meanwhile, investing is a necessity in order to stay competitive, given the changes that have been occurring in the sector over the last few years.

That includes the need to improve network quality – given the inexorable rise in mobile data consumption – and the trend of offering bundled services in the hopes of luring in and/or retaining customers.

And Vodafone has been doing just that via acquiring cable assets to broaden its offering (think Cable & Wireless Worldwide (CWW), Kabel Deutschland and, more recently, ONO). That’s aside from forking out cash to improve its networks.

By the way, on the CWW front, Vodafone claims the “expertise and skills” gained by that acquisition helped it grow revenue in its Enterprise division by 2.1%: now accounting for some 27% of group service revenue. It has plans to push into the cloud and hosting space by leveraging expertise from CWW.

A notable turnaround in the near term can’t be expected.

Conditions remain challenging, competition is fierce and it’d be no surprise if things get worse before they get better. And that’ll pressure the company for now.

But the fact that Vodafone is (and has been) rightly laying down the necessary ground work in a bid to capture future growth, surely, is apparent.

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