Jul 24, 2008
Business - Vodafone takes a hit from economic slowdown
The collapse in the Spanish housing market, one of the hardest-hit in Europe, claimed a surprising victim Tuesday when the British cellphone operator Vodafone Group said its results would suffer from the troubles there.
"There's a big macroeconomic picture that's playing through, and frankly, as a company, we're not immune to it," Arun Sarin, chief executive of Vodafone, said in a conference call. Vodafone, the largest European mobile operator, said the decline in the Spanish housing industry had led many of its customers among the migrant work force there to return to their home countries. Other customers are spending less on calls.
Vodafone cited those factors in a decision to lower its revenue forecast for the year, causing investors to dump its stock and to sell the shares of other European mobile operators.
The announcement surprised investors who had seen mobile operators as resilient to the ups and downs of the business cycle because of their multi-year contracts with customers. Vodafone shares fell almost 14 percent in London to close at 129 pence, or $2.58, giving them a loss of nearly 21 percent over the past 12 months. Telefónica, Vodafone's main rival in Spain, fell 7.4 percent in Madrid.
With the global economy looking increasingly uncertain, some cellphone users are looking to reduce or cap their out-of-pocket expenses, Sarin said, both by holding on to their old phones longer and by keeping their usage costs down.
Vodafone revenue ticked 0.2 percent lower in the quarter that ended June 30, after subtracting the effects of acquisitions and currency movements.
Sarin said that business was weaker in Britain and throughout Europe, but that the picture was particularly bleak in Spain, where revenue fell 2.5 percent from a year earlier.
Like the United States, Ireland and Britain, Spain is undergoing a painful adjustment as a property bubble deflates after easy credit and a booming economy led housing prices to quadruple over the course of a decade.
As a result, Vodafone said revenue growth in the Spanish market had stalled after years of 10 percent or more annual increases.
"The business isn't falling apart," Sarin said, "but within this business that's a segment that's having a hard time."
Sarin, who will be succeeded by Vittorio Colao as chief executive at the end of the month, has presided over an expansion that has taken Vodafone into India and other high-growth markets. Sarin did not provide details on the impact that the loss of the migrant customers had on its business. Bobby Leach, a Vodafone spokesman in London, declined to comment.
Sarin said Vodafone was cutting its revenue forecast for the current year to about £39.8 billion, or $79.5 billion, the lower end of its estimate two months ago. But he noted that the company had not changed its forecast for full-year profit of £11 billion to £11.5 billion.
Analysts said investors may have overreacted to the news.
"In a nervous market, it doesn't take a lot to punish a share and a whole sector," said Wolfgang Specht, an analyst at Sal. Oppenheim Jr. in Frankfurt. Investors have priced in "a recession scenario," he said, but the Spanish experience "is not representative of the rest of Europe, in my view."
Michael Kovacocy, an analyst at Daiwa Securities SMBC in London, said the economy represented only part of the problem for European telecommunications companies. "There was only so long that Spanish growth could be maintained at that rate, so it was inevitable," Kovacocy said.
He said operators in Europe, where markets are near saturation, were under great pressure to cut costs because European Union regulatory moves that will reduce fees and create greater competition for customers - including from so-called mobile virtual network operators - stand to hurt profits. "The changes now under way in Europe mean the profits won't come back when economic conditions improve," he said.
Results from Ericsson, the Swedish maker of wireless networking gear, also weighed on technology stocks. Ericsson's shares fell 11.5 percent to close at 66.80 kronor, or $11.18, in Stockholm after it said second-quarter net profit fell 70 percent, to 1.9 billion kronor from 6.41 billion kronor a year earlier. Revenue rose 2 percent to 48.5 billion kronor.
Norbert Walter, chief economist of Deutsche Bank in Frankfurt, said it would take three to four years for Spain to digest the effects of the construction boom and bust. Spain, he noted, with a population of about 45 million, had been building three times as many houses annually as Germany in the past few years, even though the German population, at 82 million, is nearly twice as large.
"There are number of countries where the slowdown is already hitting home," he said, pointing to Spain, Ireland and Britain.