Germany holds the key to Vodafone CEO’s success

• Vodafone has reported its fiscal full year results
• There are a number of positive trends for CEO Margherita Della Valle to highlight
• M&A deals have finally been struck and there is growth in many parts of the business
• But Vodafone’s biggest single market, Germany, is bracing itself for a hefty pay-TV sector hit
• It appears to have avoided the wurst case scenario though

Margherita Della Valle (pictured above) has been the Vodafone Group CEO for little more than a year and, in that relatively short time, has achieved quite a lot, having struck deals to sell the group’s problem child operations in Italy and Spain and getting the company much of the way towards a merger deal for its UK business. And she struck a positive note when unveiling the international operator’s full fiscal year results on Tuesday, pointing out that in the past 12 months “we have announced a series of transactions and we are now delivering growth in all of our markets across Europe and Africa.” 

That sounds impressive. “We performed slightly ahead of expectations in the financial year, with good organic service revenue growth of 6.3% and organic EBITDAaL growth of 2.2%,” noted the CEO. “Our Business division – a key growth driver – achieved 5.4% revenue growth in the fourth quarter,” she added. 

The performance of Vodafone Business is worth highlighting, given the increasing importance of enterprise customer revenues for service providers. Vodafone has 4.8 million business customers and generated full year revenues from those customers of €7.74bn, down slightly (by 0.8%) year on year on a reported basis but up by 5% on an organic basis (with variables such as exchange rate fluctuations stripped out).  

The CEO continued: “Much more still needs to be done in the year ahead. We will step-up investment in our customer experience, improve our underlying performance in Germany and accelerate our momentum in Business, whilst also continuing to simplify our operations throughout the group. We are fundamentally transforming Vodafone for growth.” Corporate fighting talk, right? 

And, for once, investors didn’t disagree, as Vodafone’s share price gained 3.7% on the London Stock Exchange to 72.6 pence, giving the operator a market valuation of almost £20bn. 

But there are still plenty of business brakes being applied as Della Valle tries to accelerate growth and achieve impressive fiscal momentum for the company. 

Total group service revenues for the financial year that ended in March were down by 1.3% on a reported basis to €29.9bn, but once fluctuations in exchange rates and other variables are accounted for, those group sales were 6.3% better than the previous full year on a like-for-like basis. Similarly, adjusted EBITDAaL was down by 11.3% to just over €11bn on a reported basis, but increased by 2.2% once the variables are stripped out. So there are positives but it’s a bit precarious.  

There’s a lot more detail in the full year report, which can be accessed here.

However, there are still some significant hurdles for Della Valle to overcome in the near term before the operator can say it’s well placed for consistent and profitable growth. 

First, the M&A deals need to be completed. The €5bn sale of the Spanish operation to Zegona Communications is in its final stages, whereas the deal to sell Vodafone Italy to Swisscom for €8bn still has a long way to go. Meanwhile, the proposed £16.5bn merger of Vodafone UK and Three has been given the green light by the UK government but is still the subject of an in-depth probe by the Competition and Markets Authority (CMA). 

And in Germany, Vodafone Group’s single biggest market, an expected but still massive blow is looming. The operator has been in the process of trying to retain 8.5 million legacy cable TV customers in multi-dwelling units (MDUs) that have, until now, been tied to Vodafone through collective deals with housing associations, but those customers can soon cut their ties with Vodafone and get their service from other providers. This is a big deal because those customers are worth about €800m in revenues per year: That might be less than 10% of the total €13bn in revenues generated in Germany in the full financial year, but it’s still very significant. Vodafone has been preparing for this eventuality for some time ahead of the new German TV laws coming into effect in July.

The worst case – or ‘wurst case’ surely? – scenario was losing all those customers but that never seemed likely and the company hadn’t provided estimates for the expected impact – until now. In its financial press release, Vodafone noted that “based on our experience to date, we expect to retain around 50% of the 8.5 million MDU TV households” and it seems the actual expected number of losses will be about 4 million, according to comments made by the CEO to London newspaper The Standard. 

So Vodafone Germany can wave goodbye to about €400m of revenues and, to make matters worse, the operator also lost 392,000 fixed broadband customers during the year following price increases.  

Germany is crucial to Vodafone – it represents 38% of total group revenues and almost half of the company’s earnings: While there are plenty of other markets where Vodafone needs to make greater positive progress or pin down a deal, overcoming these challenges in Germany looks to be the most critical aspect of Della Valle’s early years at the helm – if she can turn Germany around, then the future prospects for Vodafone will surely be much brighter. 

- Ray Le Maistre, Editorial Director, TelecomTV