Vodafone’s (LSE: VOD) (NASDAQ: VOD.US) results for the 2014 financial year were poor to say the least, and also contained some worrying numbers.
Indeed, during the space of the last 18 months, the company has reported a record fall in underlying revenue. Specifically, during the past 12 months, European revenue declined 18% and group service revenues dropped 4.3%.
Overall, Vodafone’s headline revenue fell 1.9% to £43.6bn as the slowdown within European markets more than offset emerging market growth.
What’s more, Vodafone was forced to take a further £6.6bn of asset impairment costs last year, bringing the total value of asset impairment charges taken within the past three years, on European assets alone, to almost £20bn.
Further, Vodafone’s earnings before interest, tax, depreciation and amortization margin fell by 1.3% last year, which is extremely worrying as the company has been struggling with falling margins for some time.
Still, to appease investors, Vodafone’s management hiked the company’s annual dividend payout by 8%.
Investing for growth
Vodafone’s European weakness can be traced back to two key markets; Italy and Spain.
It would appear that within these markets, where the economic climate remains chilly, the rise of free messaging apps, such as Facebook’s WhatsApp, are hitting Vodafone’s sales. Vodafone is also fighting ever-increasing competition from Europe’s other telecoms providers.
So, to counter this trend Vodafone is planning to spend £19bn globally over the next two years on ‘Project Spring, the goal is to offer the best mobile service within all key markets. This expenditure is about £7bn over the company’s normal outlay.
Unfortunately, this investment will mean that the company’s earnings will come in lower than expected for 2015 but management hopes that over the long-term the investment will pay off.
However, Vodafone’s Chief Executive, Vittorio Colao, does not sound totally convinced and he still believes that the company has plenty of headwinds to overcome going forward.
For example, Mr Colao listed the prospect of a new price war in Italy and uncertainty about the future plans in mobile by traditional fixed-line competitors such as BT and Liberty as the key threats Vodafone faces going forward.
No longer attractive
Meanwhile, AT&T, which was widely considered to be looking at making a bid for Vodafone, has made quite clear that it is not interested in the company.
Specifically, AT&T has recently made an offer to acquire US based cable TV operator DirecTV. AT&T is paying $48.5bn for DirecTV and the deal will give the company more than 38 million video subscribers within the US and in Latin America.
The deal needs to clear regulatory approval and pass a shareholder vote before it goes ahead, so it could be more than a year before the transaction is completed. It is unlikely that AT&T will make an offer for Vodafone before the deal with DirecTV is completed and the two companies have fully integrated — a process that could take several years.
Foolish summary
There is no way to sugar coat it, Vodafone is struggling, it’s as simple as that.
However, only time will tell if the company’s ‘Project Spring’ will help boost earnings and allow the company to push ahead of its peers. The project is a big multi-billion pound gamble, and things could get even worse for Vodafone if this spending does not pay off.
