Vodafone targets €1bn in savings as margins are squeezed

• Vodafone is tightening its belt as costs soar and financial pressures increase
• It aims to cut its operating costs by €1bn over the next three years
• The operator’s latest results show revenues are increasing, albeit only slightly, and it is still profitable
• But CEO Nick Read is under pressure to do more as share price sinks
• The economic scenario doesn’t look very positive for infrastructure-based service providers

Presaging what is likely to become a trend in the telco sector in the coming months, Vodafone today lowered its targets for its current financial year, highlighted multiple areas of rising costs and fiscal pressures, and announced plans to reduce its operating costs by €1bn over the next three years. The news was hardly cheery and investors reacted accordingly with Vodafone’s share price sinking by 6.9% to 97 pence on the London Stock Exchange, its lowest price since 1997. 

On the face of it, and given the current financial turmoil the world is in, Vodafone’s numbers are solid, helped tremendously by the operator’s geographic spread, particularly across Africa, where customer and revenue numbers continue to rise, making up for the relative lack of growth in some of the more challenging European countries, including the operator’s largest single market, Germany.

Across the whole Vodafone Group there are more than 300 million customers in 21 countries, of which 188 million are mobile customers in Africa, 66.7 million are mobile customers in Europe, and 25.5 million are fixed broadband customers in Europe, making it one of the biggest telcos in the world. 

In the first half of its 2023 financial year (the six months to the end of September), Vodafone’s customers generated total service revenues of €19.2bn, up 2.5% year on year. However, earnings before one-time costs, taxes, interest and other financial measures, which indicates the fiscal health of the company, declined by 2.5% to €7.2bn and net profit was down very slightly at €1.24bn, so the company is at least profitable. However, its net debt currently stands at €45.5bn, slightly more than a full year’s revenues. 

Some parts of the business are performing better than others: Vodafone Business and the operations in Africa are growing but European consumer sector revenues are shrinking slightly. Vodafone has for some time been aiming to revamp its asset portfolio to focus on markets that can deliver profitable growth while reducing its debt pile, which is why the operator has announced a number deals in recent months, including the sale of Vodafone Hungary, the plan to merge its UK business with that of rival operator Three, the acquisition of Portugal’s fourth-largest network operator Nowo, and the plan raise up to €7.1bn by offloading its stake in the Vantage Towers business into a separate entity that Vodafone would co-control with its private equity partners. There are still questions, though, about what kind of role Vodafone will play in markets such as Spain and Italy in the future. 

While such deals go through the approval motions, general inflation, higher energy costs and wage inflation is all weighing heavy on the company’s financials and, as a result, Vodafone has slightly lowered its earnings outlook for the full financial year that ends next March. 

As a result, CEO Nick Read today announced that Vodafone Group plans to increase prices and reduce discounts across Europe (some such actions have already been taken) as well as cut its annual running costs by €1bn by the 2026 financial year, with a hefty chunk of the savings coming from the simplification and digitalisation of operational processes, the broader introduction of automated processes and new initiatives to reduce group-wide energy consumption. The CEO also admitted that some job cuts are likely, though no numbers, markets or types of role were specified.   

The vernacular used by Read and his Vodafone management colleagues is still mainly positive, with talk of a “resilient performance” while “making good progress with our operational and portfolio priorities” in what is a “challenging macroeconomic environment.” And for sure, things are tough and despite everything the company is still growing and making money, so it could be a lot worse. 

But will it get any better? Something radical needs to change in the way telcos are set up and run, beyond selling assets and developing chatbots to (mostly poorly) handle customer interactions. 

Vodafone is not alone, of course. Other telcos are cutting costs and dismantling themselves while looking for the pots of gold at the end of the digital services rainbow. Is the answer to build massive customer base scale and seek partners to carry some of the burden of investing in the physical networks? Possibly, then the likes of Vodafone, Orange, Deutsche Telekom, AT&T, NTT and Reliance Jio might stand a chance of longevity but where does that leave the rest?

The current economic crunch might claim some telco victims. 

- Ray Le Maistre, Editorial Director, TelecomTV