Vodafone profits hit by aftermath of price war

Intense competition in the UK mobile phone market will continue to eat into profit margins according to Vodafone, the largest of the four British networks, which last year continued to feel the aftermath of a damaging price war.

The downbeat assessment came alongside encouraging news from Vodafone's expanding overseas operations, which revealed their first set of annual profits yesterday.

Chris Gent, Vodafone chief executive, said earnings this year would continue to be hit by the cost of moving customers from the older analogue networks to digital.

Last year incentives to encourage them to stay with Vodafone cost the group pounds 52m. Vodafone Digital had 1.48 million customers at the end of March, giving the company 36 per cent of the UK market, up from 521,000 the year before. It meant for the first time a majority of customers were on digital.

Revealing a drop in profit margins from almost 40 per cent to 35 per cent, Mr Gent said these one-off costs should fall as the analogue network declined. But he added: "The outlook for margins in the UK is probably modest decline. We are in an increasingly competitive scene."

Last week One 2 One, the smallest of the four networks, launched new price packages which it said were cheaper than the competition. Vodafone and Cellnet were both hit by attracting low-spending customers with cut- price deals in Christmas 1995. Many decided to hand back their phones a year later.

The after-effects were reflected in a drop in Vodafone's average customer revenue from pounds 481 to pounds 427 and an increase in churn, which measures how quickly people leave the network. The UK subscriber base grew more slowly, by 415,000 customers last year compared with 633,000 customers the year before.

Vodafone yesterday reported a 25 per cent rise in its turnover for last year to pounds 1.75bn, though pre-tax profits increased more slowly by 13 per cent to pounds 539m. Profits from the UK operations rose by 5 per cent to pounds 519.1m, while overseas profits were pounds 10.5m compared with losses of pounds 27m in 1995. Total subscribers, including the share of overseas operations, rose by 32 per cent to just over 4 million. The shares were unchanged at 271.5p.

Mr Gent said it was "very likely" that Vodafone would take up an option to increase its stake in the French mobile network, SFR, from 16.1 per cent to 20 per cent.

The investment brought the UK group into an unlikely link last year with British Telecom, which bought an indirect stake in SFR and also owns 60 per cent of Cellnet. "We are good competitors and good allies," said Mr Gent.