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Vodafone Group plc (VOD) announced its results for the fiscal year ended Mar 31, 2014 on May 20.

The company reported adjusted earnings per share of 17.54 pence (approximately 27.87 cents), down 12.8% year over year. The drop was due to lower adjusted operating profit, offset by reduction in shares outstanding owing to the company’s share buyback program.

The company recorded consolidated revenues of £43.616 billion (approximately $69.3 billion), down 1.9% year over year on a reported basis and 3.5% on an organic basis. Group service revenues (91% of total revenue) dropped 2.4% year over year to £39.529 billion (approximately $62.82 billion) on a reported basis and decreased 4.3% on an organic basis given the impact of a challenging European economy coupled with rising regulatory and competitive pressures.

Segment-wise Results

Europe: Revenues declined 2.1% on a reported basis but decreased 9.3% on an organic basis year over year to £27.997 billion (approximately $44.5 billion). The organic decline was due to poor economic conditions in some markets, competitive pressure and the impact of MTR cuts, partially offset by growth of mobile in-bundle revenues. Service revenues in this segment were down 2.0% year over year on a reported basis and dropped 9.1% on an organic basis to £25.977 billion (approximately $41.3 billion).

Africa, Middle East & Asia Pacific (AMAP): Revenues from this segment declined 2.9% on a reported basis given unfavorable foreign exchange rate movements but grew 8.4% organically year over year to £14.971 billion (approximately $23.80 billion). Service revenues declined 4.7% on a reported basis and grew 6.1% organically year over year to £13.087 billion (approximately $20.3 billion) driven by customer additions and favorable pricing as well as increased demand for data. Countries like India, Qatar, Ghana and Turkey as well as Vodacom delivered strong results. This was offset by the negative impact of MTR reductions, regulatory pressure and poor market conditions in certain countries.

Subscriber Trends

During fiscal 2014, Vodafone’s total mobile subscriber base reached 433.681 million (79.9% represented by prepaid). In Europe, the company lost 1.3 million subscribers, bringing the region’s total customer base to 122 million. Africa, the Middle East & Asia Pacific added 9.1 million customers, taking the total subscription tally to 297.4 million.

Liquidity

Vodafone Group generated free cash flow of £4.405billion (approximately $7billion), down 21.5% year over year.The decrease in free cash flow results were due to negative currency translation of the sterling against the South African rand and the Indian rupee, offset by favourable changes in the euro. Capital expenditure was £7.1billion (approximately $2.9 billion), up 13.3% from the year-ago period. 

Dividend

The company’s board of directors approved a dividend per share of 7.47 pence, bringing the total dividend per share for the year to 11.00 pence, which is up 8% year over year. 

Guidance

For fiscal 2015, the company expects EBITDA in the range of £11.4 billion to £11.9 billion, and positive free cash flows. The company also projects a £19 billion capital expenditure program of two years ending March 2016, which will then normalise to 13–14% of annualised revenues in the subsequent years.

Our Analysis

Despite the strong growth prospects of Vodafone, we are concerned about a decline in service revenues and subscriber count, particularly in the European continent. Continued economic weakness, regulatory pressure, stiff competition, reduction in mobile termination rates (MTRs) and roaming prices proved detrimental to the company’s growth. However, Vodafone’s strong performance in emerging markets can partially offset the challenging market conditions and provide a high profit margin given lower infrastructural costs. Further, the company is increasingly making efforts to shift toward more data-centric services as the level of data services in these markets is considerably low, thus providing opportunities for deeper penetration.

Vodafone currently has a Zacks Rank #5 (Strong Sell).

Other Stocks

Other stocks worth considering within this sector are Level 3 Communications Inc. (LVLT), Telstra Corporation Limited (TLSYY) and TalkTalk Telecom Group PLC (TKTCY). While Level 3 Communications and Telstra Corporation sport a Zacks Rank #1 (Strong Buy),  TalkTalk Telecom has a Zacks Rank #2 (Buy)

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