|
NEW YORK (FORTUNE) -
Beaten up by investors mad at the recent drop in Vodafone shares, CEO Arun Sarin, went on the road just before Thanksgiving to explain that, while growth is slowing, the world's biggest mobile phone company is hardly turning into the AT&T of the wireless world.
After meeting with investors in Boston and New York, Sarin talked with Fortune at the Four Seasons hotel on Nov. 22 and blamed three factors for the fall in the company's shares, which sank 11 percent on Nov. 15, the day the British company announced its first-half results. It was the largest one-day drop in its share price in seven years.
First, Sarin said, investors were surprised by a $8.6 billion potential tax liability arising from its purchase several years ago of Germany's Mannesman. Secondly, they fear that increased competition in Europe from Spain's Telefonica, Germany's Deutsche Telekom and Italy's TIM will depress profit margins next year. Lastly, they didn't expect margins in Japan to drop from the low 20s to the high teens, as the company has said.
"Those were the big surprises for our shareholders," Sarin said. But all three issues had been disclosed if investors knew where to look, the CEO said. Vodafone (Research) has carried a reserve for taxes of $15.4 billion on its balance sheet since 2001. It's just that about $8.6 billion of that may come due in the next three to four years as the company works through tax disputes with the British, German and other European tax authorities.
While it's true that margins in Europe are likely to be hurt in the next few years, Sarin said he thinks Vodafone's pain will be less than its competitors because they are playing catch-up in investing in 3G, the latest high-speed version of the wireless network technology.
As for Japan, when Vodafone announced its plans in May to recoup lost market share, it talked about gaining customers -- but didn't then say it would cost it several points in profit margins. "Nobody asked us the question," said Sarin. Vodafone has been losing customers in Japan because it was two years late introducing 3G. "Only in the last couple months do we finally have our handsets, prices, network and distribution competitive," Sarin said.
Identity problems
Vodafone's problems are further complicated by its image. Is it a growth stock with the potential for double-digit revenue gains? Or is it a utility, with little growth but a high dividend payout? Vodafone plans to increase its payout ratio -- the percentage of its net income devoted to dividends -- to 50 percent from the current 46 percent for the fiscal year ended March 31, 2006. Investors who want Vodafone to act like a utility want that ratio to increase to 80 percent or so, said Sarin.
Those that want Vodafone to grow faster want it to pay out less and invest more in high-growth markets such as India, where it recently purchased 10 percent of Bharti, the country's biggest mobile operator. "Some shareholders thing we have gone ex-growth," said Sarin. "Others think we have lots of gas in the tank."
The truth is the company is awkwardly positioned between the two extremes. It expects revenue growth to slow from around 7.5 percent this year to 5 percent in the year ended March 31, 2007. Because of the profit margin hit it expects to take in Japan, overall profit margins will drop by a percentage point to about 37 percent, Sarin said.
"Yes, growth is slowing down a bit, but longer term we still see good growth prospects," Sarin said. "Not double-digit growth like we saw in the year 2000." To compensate for slower growth in mature markets, Sarin said the company will make "targeted" acquisitions in countries with few mobile phone users but high growth potential, such as certain countries in Africa, Asia and Eastern Europe. It already operates phone companies in South Africa, Romania and the Czech Republic and plans to bid on the cell phone company in Turkey.
"We are growing our revenue, we are producing profits, we are outperforming our peers," said Sarin. "We are taking share from land lines, and introducing new technology that will allow us to sell wireless DSL, mobile TV, games and music downloads."
"Our shareholders will either like this story," said Sarin and, presumably continue to own the stock. "Or they won't like it." And sell.
________________________
More from FORTUNE:
|
