Vodafone warns of margin pressure

Mobile phone giant Vodafone added to worries about its UK business today after revealing a further decline in domestic profit margins.

In a climate of increasing price and regulatory pressures, the company said UK margins for the second six months of the financial year to March would be lower than the 30.8% reported for the UK business for the half-year to September.

The company has also suffered from declining UK revenues, which dipped 1% to £2.5bn (€3.7bn) in the half year to September 30.

In the five months to February the firm posted margins of 26.6% after reducing tariffs but keeping acquisition and retention costs – the level of subsidy paid by Vodafone on its handsets – high in order to retain customers. The firm’s shares were down more than 3% today.

Like other mobile phone operators, the firm has been hit by increased competition, including more flexible contracts from the likes of T-Mobile as well as the introduction of VoIP services such as Skype which enables telephone calls to be made over the internet.

UK regulations on call termination costs – the charge made by operators to end a call from a customer on another network – have also squeezed margins.

But management highlighted year-on-year service revenue growth of 4.8% in the UK during January and February this year, compared with 3.3% in the three months to December.

The company’s UK chief executive, Nick Read, told investors and analysts that the business would focus on more flexible pricing and advanced technology for business customers and consumers as well as a drive to cut costs.

Mr Read is also aiming to increase Vodafone’s share of the £1bn (€1.47bn) wholesale mobile market and today the firm announced an agreement with Asda for the supermarket chain to offer its own branded mobile phone service using the Vodafone network.

The deal will help Vodafone increase its current 8% share of the £1bn (€1.47bn) wholesale mobile phone market. Asda will roll out its branded phones across 150 stores.

Vodafone, which already has a 46% share of the UK business market, is looking to increase revenues from business customers still further with its ’Mobile Plus’ strategy aimed at providing better links between mobiles and PCs.

The company is also targeting small businesses through a deal with PC World and Currys owner DSG International to provide 30 new ’Connectivity Centres’ placed in PC World stores.

The company said that 2.2 million customers had signed up to its "free weekends" tariff, with usage among participants increasing by 150%.

More flexible pricing and subsidies for higher value customers are also expected, and UK customers will also see cheaper phone bills if they agree to receive advertisements on their mobile phones.

Today’s meeting with investors also focused on a tough German market where call rates per minute are being reduced by an effective 25% a year.

Vodafone expects the tough competitive and regulatory environment to continue into next year, although the firm said it had grown pan-European revenues by 2.1% in the three months to December despite a “challenging” competitive and regulatory environment.

It has outsourced its IT and back office functions and moved to reduce network costs.

Despite the tougher European market, Vodafone posted worldwide adjusted operating profits up 7.5% to £5.1 billion during the first six months of the year to September 30.

It was helped by a 4% increase in revenues to £15.6bn (€22.9bn) compared with the same period last year, thanks to powerful progress at its Spanish operation.