Vodafone makes £9bn payout after record loss

Vodafone unveiled its strategy to combat the threat posed by new technologies yesterday with plans to enter the European broadband market. The strategy, alongside a £9bn cash return to shareholders and a dividend rise, helped offset negative sentiment after the telecoms giant reported the largest-ever loss in European corporate history.

Vodafone has come under increasing pressure to detail its plan to respond to the threat from technologies that enable cheap mobile voice calls. It also faces competition from rivals that will soon offer customers fixed, mobile, television and broadband internet as one package.

Abandoning its pure mobile strategy, Vodafone has decided to match rivals such as Orange and Carphone Warehouse by offering broadband as part of a bundled package. It will also take on BT by cutting mobile tariffs when mobiles are being used in the house or at business premises. It already offers such products in Germany and Italy, and expects a significant uplift in revenue from customers who migrate to the service.

The new strategy was unveiled alongside a pre-tax loss of £15bn for the year to 31 March, compared with a £7.3bn profit in 2005. The loss was a result of Vodafone's decision to write off the value of some of its assets, specifically in Germany. The write-off impliesVodafone no longer expects the same return on investment on those assets as when it bought them.

However, Vodafone's operating performance was better than the record loss suggested, with revenue up 10 per cent to £29.4bn and adjusted earnings per share 13 per cent higher at 10.11p.

The group says it has ceased its share buy-back programme after buying £6.5bn of its stock last year. Instead, it will pay out 60 per cent of its adjusted earnings per share via dividends, a move reflecting the maturity of its core business. It raised its dividend for the year by 49 per cent to 6.07p in line with that strategy.

The company also sweetened the blow of the write-off with a one-off return to shareholders of £9bn, much more than the £6bn it promised to return after it sold its Japanese unit earlier this year. Shareholders will receive the funds in August following a share consolidation scheme.

Arun Sarin, Vodafone's chief executive, said its strategy going forward - dubbed "Mobile Plus" - will steal revenue from fixed-line players. Rather than just bundling internet access into mobile voice packages, Vodafone will allow customers to access personal computers via mobile handsets, offering common applications across the hardware.

Vodafone expects its German "home-zone" product's revenue to increase to €224m (£153m) next year from €80m in the fiscal year 2006.

Mr Sarin said: "New realities are emerging in the mobile industry... we have to make sure we stay ahead of the game."

Vodafone is also targeting the advertising market, arguing it has more than 170 million customers and a unique view of their personal tastes. Mr Sarin said its customers will not be bombarded with unwanted advertising. Instead, users will choose to receive relevant promotional material.

Vodafone expects to derive 10 per cent of its revenue from "Mobile Plus" services within four years. That will help offset declining voice prices and increased regulatory pressure. Vodafone will also pare costs through a variety of moves, including 400 job cuts at its headquarters in Newbury. Andy Halford, the chief financial officer, expects to slice between £550m and £700m from its cost base within a year.

Vodafone shares ended unchanged at 119.75p.

Numbers game

* Vodafone reported a record £14.9bn loss after writing off the value of some of its assets, mainly its German unit which was bought for £101bn in 2000.

* Vodafone had more than 170m worldwide customers at the end of March. It grew revenue 10 per cent to £29.4bn in fiscal 2006.

* Vodafone will return £9bn to shareholders this year via a one-off cash return. It bought back stock worth £6.5bn in fiscal 2006 and raised its dividend 49 per cent, equivalent to £3.7bn.

* Vodafone aims to offset the impact of declining voice prices, competition from emerging rivals such as Google and regulatory pressure, by tapping new revenue sources, including broadband, home-zone pricing and mobile advertising.

* Vodafone also aims to slash its cost base to deal with the more competitive environment. It will cut 400 staff at its Newbury headquarters - a move described as "appalling" by the Communication Workers Union.