Vodafone Hit by Asset Write-Down, Unveils New Strategy

Mobile giant Vodafone has unveiled its long-awaited new strategy, detailing the direction its business will take in the next year and helping to calm growing wariness about the group's lacklustre performance. The group outlined the core tenets of its new strategy, which focuses on: cost reductions and revenue stimulation in Europe; delivering strong growth in emerging markets; meeting growing demands for fixed-mobile convergence services; taking extra care prior to any mergers and acquisitions (M&A) activity; and putting shareholder interests at the heart of its strategy.

The group released its end-year results, reporting an 11.4% organic rise in operating profit for the year ended 31 March 2006. However, the achievement was overshadowed by the effect of a £23.52-billion (US$44.13-billion) write-down of the group's assets in Germany. The write-down led to record losses of £14.1 billion, but profits without the impairment charges rose to £9.4 billion from £8.35 billion a year ago. Revenues were also up organically, rising 7.5% to £29.35 billion compared to £26.68 billion for the year ended in March 31 2005. Vodafone said that it outperformed all of its principal competitors, reporting a 6.9% organic rise in earnings before interest, taxation, depreciation and amortisation (EBITDA) to £17.77 billion.

To soften the effect of the losses, the largest in U.K. corporate history, the group announced an extra £3-billion cash return to shareholders, taking the total to £9 billion. Vodafone said that it plans to cut up to 400 head office jobs in the United Kingdom and to outsource services as part of a cost cutting measure. Despite slowing growth in its European markets and the effect of new technology, the group added 21.5 million new customers in the year, boosting its proportionate customer base to 170.6 million with 7.7 million registered 3G devices. Vodafone said that 27.1 million devices used its Vodafone Live! Portal, helping it to boost the proportion of non-voice services as a percentage of service revenue from 15.5% for the year ending in 31 March 2005 to 17% for the year ended in 31 March 2006 (see World: 24 January 2006: Vodafone Beats Forecasts for Subscriber, Revenue Growth).

Outlook and Implications

• New Outlook: Given the crises that have dogged the group since 2005, its new strategy creates an entirely new outlook for the group. Last month, the company realigned itself under three divisions, focusing on Europe, emerging markets & affiliates and new technology, suggesting a three-pronged frontline for its business. The group has taken steps to avoid the controversies that plagued its US$4.55-billion acquisition of Telsim Turkey, in which it was accused of overpaying. Instead, the group said that future M&A activity will be guided by stringent conditions that are backed by an ultimate desire to maximise value for shareholders. Vodafone said that it is happy with its stake in Verizon Wireless in the United States, Vodacom in South Africa and SFR in France, although it admitted that new developments could make it rethink its strategy (see World: 7 April 2006: Vodafone Realigns Units Ahead of Strategy Review, France: 23 March 2006: Vodafone May Get Its Hands on SFR, Japan: 17 March 2006:Vodafone Announces Sale of Stake in Japanese Unit to Softbank, World: 13 March 2006: Vodafone's Global Strategy Under the Spotlight and Turkey: 14 December 2005: Vodafone Beats the Competition to Acquire Telsim).
• Boosting Profitability: Vodafone has set out an ambitious target to slash costs from its operations and ensure profitability in the coming year. With a potential loss of 10% of its call revenue from the European Union (EU)'s imposed cuts on roaming fee charges, the group has outlined plans to migrate high-value customers from prepaid to contract plans. The company is also introducing 'family plan' tariffs and has committed to promote its Vodafone Passport initiatives. Apart from the projected 400 job losses, the group has outlined an extensive outsourcing initiative. Vodafone said that it expects savings of about 25-30% within three to five years from outsourcing its IT Application Development and Maintenance activities. It also said that it would centralise its Network Supply Chain Management activities, with expected savings of 8%, and consolidate its data centres on a regional basis. It said that it expects savings of about 25-30% within three to five years for the latter (see Global: 27 February 2006: Vodafone Expects Slower Revenue Growth).
• Mobile Plus: Vodafone has given the strongest indication yet of its plans to enter the fixed market. The company said that it was poised to meet its customers 'total communication' needs, insisting that its duty to provide such services was sacrosanct regardless of whether it would be through mobile, fixed services, Wi-Fi or new internet technologies. Vodafone said that its Mobile Plus initiative will focus on extending existing service offerings in the home and at the office to meet customers' growing voice and broadband data service needs. The company said that this initiative includes DSL and that its German unit will no longer sell its fixed unit Arcor. Instead, Vodafone and Arcor will partner to launch bundled services before the end of the year. The company said that it has launched initial offerings in this area, including Zuhause in Germany and Vodafone Casa in Italy. Network upgrades to HSDPA will boost the Mobile Plus initiative and would make Vodafone better able to integrate mobile, PC and the internet at the application level and compete against the likes of Google and Yahoo. The Mobile Plus initiative also includes plans to introduce advertising based services such as its recently announced co-operation with Google (see Germany: 10 March 2006: Vodafone Mulls DSL Market Entry, Units' Merger Possible and World: 15 February 2006: Vodafone Brings Google Search to Mobile Phones).