Vodafone shocked the City yesterday by becoming the the first telecoms company to warn that revenues would suffer from the deteriorating economic conditions, increasing fears of recession in the UK.
The market reacted badly to Arun Sarin's last quarterly results as Vodafone chief executive, sending the telecoms' group shares plunging 16 per cent at one point. The world's largest mobile phone group hinted at a "recessionary impact" in the UK and a slowdown on the Continent, dragging on its full-year returns in a sector that had been considered "immune" to the credit crunch.
Mr Sarin said yesterday: "We are beginning to see an impact from the current economic environment which is greater than we expected."
Dean Reynolds, an analyst at Execution, said yesterday's announcement was the "first time we have seen a telecoms company" acknowledging the weakening economic situation.
The group revealed its revenues for the year would be at the bottom of its previous predictions – at about £39.8bn – which reflected its "first-quarter performance, recent economic weakness and lower than expected equipment revenue".
While the UK slowed, Vodafone's business in Spain was worst hit "by economic and competitive effects" as consumer spending fell and the credit crunch bit. In particular, Mr Sarin said, Vodafone had been hit by a fall in the number of ecnomic migrants working in Spain, in particular in its construction industry, and to a lesser extent in the UK and Ireland.
Simon Weeden at Goldman Sachs said: "We expect the market to take a fairly dim view of the miss to revenue and revision of guidance, evidence of economic sensitivity in Spain and reference to early signs of 'recessionary impact' in the UK."
The market duly complied and the shares, which have performed relatively well compared with the FTSE All Share index in the past month, closed 13.6 per cent lower at 129p.
Mark James, at Collins Stewart, said: "Vodafone is probably the first telecoms group in the world to say it is not immune to the wider market decline. It has slowed in Spain and the UK, and failed to grow as hoped elsewhere in Europe. This is clearly an issue for telecoms groups in the developed markets." Shares in rivals including Telefonica and Ericsson fell on the back of the news.
"Up until Tuesday, telecoms companies have been relatively immune from the economic slowdown, and as a result investors have been camped out in the sector," Mr James said. He added that what had traditionally been seen as a defensive investment "has now experienced a sentiment shift". Vodafone's statement yesterday kicked off the telecoms sector reporting season in Europe, with TeliaSonera and Belgacom due to report later this week.
The group's first-quarter results showed that revenues had risen 19.1 per cent to £9.8bn, driven by returns in its data business and strong growth in India, but were still lower than analysts had predicted. Goldman added that the announcement brought "to an abrupt end the growth story that was Vodafone Spain.... As guidance was set at the end of May, trading may, in our view, have deteriorated in Spain only late in the quarter".
Exactly a week before he is to step down, Arun Sarin remained upbeat. He said that despite the challenging environment, the group had benefited from the diversity of its operations. "While we expect revenue around the bottom of the outlook range, our continued focus on cost reduction enables us to reiterate our operating profit and cash flow guidance for the year," he added.
Mr Sarin announced his decision to leave the group, after five years, in May. His position will be taken by Vittorio Colao, his deputy. Mr Sarin pioneered Vodafone's drive into the emerging markets, culminating in the $11bn (£5.5bn) takeover of the Indian group Hutchison Essar last year.
Mr James of Collins Stewart remains unconvinced that the strategy will remain viable in the short term. "Today's emerging markets are tomorrow's developed markets – the prospects for a slowdown in the medium term are there," he said.