Vodafone showed the world yesterday what its business looks like without its giant stake in the US telecoms group Verizon – and it wasn't pretty.
Its shares crashed more than 5 per cent as the chief executive, Vittorio Colao, admitted that Vodafone's now vital European operations were declining at a rapid rate, leading it to write £6.6bn off the value of its businesses in the region and warning that next year's profits would fall.
The announcement disappointed investors who earlier this year toasted a record-breaking £51bn return of cash from the telecoms giant after it sold its stake in Verizon Wireless. Now Europe is responsible for two-thirds of Vodafone's sales, but the market there is suffering badly as regulators order mobile firms to cut their customers' bills. Vodafone's European revenues plunged 9.1 per cent in the last quarter.
All four of its big European markets – the UK, Germany, Spain and Italy – saw continued falls as regulators clamped down. Analysts at Berenberg bank said some of the trends in terms of falling profitability were "very bad".
Sales fell 3.6 per cent on an organic basis in Britain – the eighth consecutive quarter of decline – although Mr Colao noted that it was an improvement on the previous quarter. "It is difficult to say when exactly it will turn around," he said.
In another worrying sign, Mr Colao admitted that Vodafone has won only 637,000 4G customers in Britain – far behind rivals EE with 3 million and O2 with 1 million. He insisted he was "pleased" with progress on 4G and did not want to get into a "game" about subscriber numbers.
Mr Colao said headline profits before exceptional items, known as Ebitda, will be between £11.4bn and £11.9bn in the coming year, against £12.8bn in the previous financial year to March.
At the time of the Verizon sale, Mr Colao promised to invest billions of pounds in its Project Spring initiative to upgrade its network with super-fast 4G coverage. However, investors are fretting that Vodafone is now too dependent on Europe. The Vodafone boss was "optimistic" about growth from selling data, expansion in emerging markets, and selling "unified communications" – a mix of mobile, broadband and pay-TV. He recently bought the "fixed-line" firms Ono in Spain and Kabel Deutschland in Germany.
Some analysts were sympathetic to Mr Colao, who has made Vodafone the biggest dividend payer in the FTSE 100, but they are worried about whether his long-term investments will pay off soon.
Espirito Santo bank said it made sense for Vodafone to "make a clearer distinction between the quality of its network and the competition", adding: "Should this be achieved, then alongside an improving macro environment, Vodafone shares should benefit. However, at this juncture, visibility of success is low and competitive forces remain substantial."
Berenberg was upbeat, seeing "good reasons to expect a further material improvement" as Project Spring kicks in. But Jefferies bank said there was "little to inspire confidence in turnaround prospects".
Sentiment has also soured as merger prospects have receded. AT&T, which ruled out a takeover of Vodafone in January, is buying DirecTV in America, while BSkyB, another mooted partner, is now looking to merge Sky's European operations.
Vodafone fell to an annual pre-tax loss of £5.27bn. Post-tax profits soared to £59.4bn thanks to Verizon Wireless and a huge tax credit from its Luxembourg operation. Revenues fell 4.3 per cent on an organic basis to £38.35bn. The dividend rose 8 per cent to 11p.