Vodafone’s numbers offer turnaround hope

  • New CEO Margherita Della Valle is making her mark
  • Financial numbers are at least improving if not yet impressive
  • Business services arm is performing well, as is Vodacom in Africa
  • But three major European markets are still shrinking

Margherita Della Valle knew what she was getting into when she took on the role of CEO at Vodafone Group on a permanent basis in April this year – as the telco’s CFO she already knew the business, where she has worked for almost three decades, inside out. A few months later there are signs she is having a positive impact, as the operator’s financial performance is improving (if still very far from being commendable) and investors are responding favourably – at least for now.   

The operator’s fiscal first-quarter trading update, which covers the period April to June, displays signs of small victories in major markets and solid performance from the telco’s operations in Africa and from Vodafone Business, the division that services enterprise customers. Total revenues of £10.74bn are down by 4.8% from the same period a year ago, but stripping out the impact of currency rate fluctuations and other factors to provide a like-for-like comparison, sales were better by 3.7%.   

Vodacom, the company’s operation in Africa, reported a 9% like-for-like improvement in service revenues to £1.43bn, driven mainly by gains in South Africa and Egypt, while Vodafone Business reported a 2.6% increase in organic service revenues to just under £2.6bn, driven, according to the CEO, by a strong performance in cloud and IoT service sales and growing demand for security services. Vodafone Business is growing across pretty much all markets except for Spain, noted Della Valle during a Q&A session with financial analysts held on Monday morning. 

That’s all great, but it’s nowhere near enough. Vodafone is weighed down by its legacy portfolio, especially across southern Europe, and by a complex operating model, something that the CEO says she is working hard to fix. She added that she is focused on customers (meeting their needs), simplicity and growth: Della Valle wants Vodafone to be simple to deal with (an open admission that, currently, it is not) and her view is that this goal can only be achieved if Vodafone itself is a simpler and leaner organisation – hence the move, announced in May, that the operator is cutting 11,000 jobs, more than 10% of the total workforce, over the next three years.   

“We have taken action to implement a third of the 11,000 [cuts] and the [most recent] initiative was in the group centre, where we have now completed our actions for the year,” noted the CEO, adding later in the Q&A session that an agreement has been struck with unions in Italy regarding 1,000 roles and talks are underway with employee representatives in Germany.

Germany gets a lot of attention whenever Vodafone is reviewing its business, and with good reason – it is the operator’s largest single market, generating more than 30% of all revenues, and is one of the worst performing markets in its portfolio, with customer and revenue numbers constantly on the slide. The numbers are dropping at a slower rate now, though, mainly thanks to a reversal in fortunes for its mobile business and because Vodafone Germany increased its fixed broadband service prices earlier this year without suffering a mass exodus of customers. Price increases elsewhere have also helped to shore up the telco’s numbers.

But that’s just a band-aid and will only help in the short term. Della Valle knows that and, besides, Germany isn’t her only problem market – Italy and Spain are also still shrinking currently. The CEO believes Germany can be fixed, whereas Italy and Spain, while smaller, are arguably more problematic, and have long been on the list of Vodafone markets, along with the UK, where the operator knew it either needed to bulk up and gain more scale, or get out. Della Valle’s predecessor, Nick Read, was unable to strike the deals needed to fix those Mediterranean issues, and that was part of his downfall. 

So can Della Valle, pictured below, deliver on the portfolio restructuring that has long been discussed, as well as turning around Germany? Well, she has managed to at least broker the long-awaited merger agreement between Vodafone UK and Three, which was announced in June, but still faces very high regulatory hurdles.

Vodafone Group CEO Margherita Della Valle.

Vodafone Group CEO Margherita Della Valle.

The CEO didn’t discuss Italy during the call but said there is a “big review [underway] of the business in Spain”, adding that cost-cutting actions are already underway, including the closure of 15% of retail stores and an end to some dealer relationships as the strategy shifts to digital sales channels. But much more needs to be done in Spain and what the CEO described as “inorganic” moves are being considered, a reference to M&A options. Such opportunities are limited, however, as Vodafone lost out to Orange Spain in the battle to merge with MásMóvil – that consolidation move, however, is the subject of an in-depth investigation by the European Commission, which may deem the combination anti-competitive. If that happens, Vodafone might look to step in, though the Vodafone CEO hinted that there were also options that didn’t hinge on the outcome of the EC’s competition probe. 

Such moves take time, though, and Della Valle seems keen to get the business straightened out quickly. In addition to getting the UK deal over the line, the priority is to turn around Italy, Spain and Germany, where Vodafone will face another massive test at the start of next year when a regulatory change means that 8.5 million Vodafone TV customers will no longer be tied into housing association mass agreements and will be able to make individual choices – the worst-case scenario for the operator is that there is a mass churn, they all move to a rival and Vodafone Germany loses up to €800m in annual revenues, though current marketing tests suggest the company might be able to hang on to most of those relationships. 

So another major upcoming challenge in Vodafone’s main market, where at least Della Valle will be getting a helping hand (from September) from new CFO Luka Mucic, who was named to the role today. Handily, coming from enterprise tech giant SAP, he has experience of Germany, technology and customer finances. 

The CEO needs all the help she can get. “With three major markets in negative territory we still have a lot to do,” noted Della Valle.

But it seems investors are starting to believe she is the person to get the job done, as Vodafone’s share price gained 3.7% to 76.3 pence on the London Stock Exchange on Monday. If nothing else, there’s at least hope of a turnaround. 

- Ray Le Maistre, Editorial Director, TelecomTV