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Vodafone profit jumps 24%
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November 14, 2000: 12:38 p.m. ET
Expansion trims profit margin but No. 1 cell phone operator meets forecasts
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LONDON (CNNfn) - Vodafone Group PLC, Europe's most valuable company and one of the world's most aggressive, reassured investors Tuesday that its breakneck takeover spree of the past 18 months hasn't been at the expense of earnings, reporting a 24 percent rise in half-year profit.
Vodafone became world's No. 1 mobile phone company through this year's record-breaking $173 billion takeover of Germany's Mannesmann AG, which followed the $60 billion purchase of Californian Airtouch Communications Inc. in 1999. Customer numbers rose by Sept. 30 to 65.5 million -- more than the entire population of the U.K., and an increase of 12.2 million from the end of the previous fiscal year.
 While that growth led to narrower first-half profit margins in the key British and German cell phone markets, Vodafone (VOD) said it expected margins to widen again in the final months of the year.
Chief executive Chris Gent told CNNfn that Vodafone's expansion wasn't over and he expected more deals for the company in the next year.
"We've got seven or eight opportunities we're looking at," he said in an interview.
"There are bargains about, share prices are low and there are not too many buyers about. We can expect more deals in the next 12 months," Gent said, declining to elaborate.
Vodafone's forecast, and a profit report that matched the more optimistic expectations for half-year earnings, fueled a 10.2 percent surge in the stock -- the most heavily weighted member of London's FTSE 100 index -- to 260.50 pence in late trade. At that price, the company has a market value of £160 billion ($230 billion).
The stock had tumbled 17 percent this month amid worries about pressure on profit.
"People have been focusing on the cost of subscriber acquisitions, especially in Germany in the first half, we think that will be less of an issue overall from now on," John Tysoe, WestLB Panmure told CNNfn.com.
"The proportionate rate of customer acquisition is going to slow, and that will boost profitability," he said.
Top of the range
Half-year earnings before interest, tax, depreciation and amortization (EBITDA) rose to £3.28 billion ($4.76 billion), while analysts told Reuters their forecasts ranged from £3.0 billion to £3.3 billion. Companies report EBITDA to show the progress of their underlying business, ignoring any ongoing impact of sums spent buying other companies, for example.
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We've got seven or eight opportunities we're looking at...We can expect more deals in the next 12 months
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Chris Gent
Vodafone CEO |
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Revenue climbed 32 percent to £10.17 billion. Vodafone reported its results as if its purchases of Airtouch and Mannesmann had been completed on April 1, 1999 and April 1, 2000, respectively.
The cost of connecting 5.4 million net new customers to the company's D2 network in Germany trimmed that unit's EBITDA profit margin to 30 percent in the first half from 45 percent a year earlier.
In the U.K., the margin fell to 30 percent from 33 percent as 1.4 million net new customers signed up for Vodafone services, bringing its British customer base to 10.2 million. The profit margin, a measure of a company's profitability, expresses EBITDA as a percentage of sales.
Faced with declining revenue per customer, Gent said that continued growth would be driven by new services from third-generation, data services, to video transmission.
After tax, interest and acquisition-related costs, the company recorded a net loss of £4.66 billion, most of the deficit attributed to the £5.6 billion cost of amortizing goodwill acquired in recent acquisitions. In the same period a year earlier, the first-half net loss was £72 million.
A company acquires goodwill -- and has to write it off over several years as a reduction of profit -- when it buys other companies for more than the value of that business's tangible assets. Vodafone's goodwill charge is particularly high because it spent massive sums in the past 18 months buying Airtouch Communications and Mannesmann. The goodwill charge is an accounting adjustment, however, and not a cash cost.
Vodafone raised its half-year dividend by 5 percent to 0.688 pence per share.
Vodafone sees improvement in second half
Gent was upbeat about the prospects for the remainder of the year.
"We are expecting an improvement in the second half over this very good first half," Gent told a news conference call. "We do believe we're in pretty good shape over the next couple of years."
Gent said the new customers would start to make a profit for the company in the second half, lifting the profit margin back to 35 percent in Germany and 33 percent in the U.K. by March 31, the end of Vodafone's financial year.
Vodafone's debt, accumulated like other mobile companies by spending big sums on licenses to operate next-generation mobile-phone services, doubled to £13.2 billion in the first half. The company expects it to fall to £10 billion or less by March as payment is made for its sale of its Italian Internet service provider and fixed-line firm Infostrada SpA.
 Gent also told CNNfn that he hopes to raise the company's 2.2 percent stake in the Hong Kong-listed China Mobile (Hong Kong) Ltd. to around 20 percent in four to five years.
Vodafone will be able to offer its management experience in helping China's leading wireless firm deal with an increasing number of competitors, Gent said.
The company would also be interested in increasing its 21.7 stake in Spain's Airtel Móvil by buying British Telecommunications (BT-A) 17.8 percent stake, if it puts it up for sale, Gent told CNNfn. BT said Thursday it was in talks to sell some of its businesses as part of a plan to reduce its heavy debt by the end of 2001.
The U.K. telecom firm is in talks to buy Irish mobile operator Eircell from Eircom PLC. Gent said he should know by the start of December whether that deal would proceed.
The CEO said he expected to offer shares of Mannesmann's fixed-line Arcor unit for sale to the public by the end of the year, but there was some uncertainty because the company had to be reorganized first.
--from staff and wire reports 
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Vodafone Group
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