Vodafone Earnings: Misses Full-Year Guidance, but Launches Encouraging Long-Term Strategic Review

No-moat Vodafone’s VOD shares are down 4% at the time of the writing as the company missed its full-year targets, with adjusted EBITDAaL coming in at EUR 14.7 billion compared with guidance of EUR 15.0 billion to 15.5 billion. We maintain our GBX 125 fair value estimate as our fiscal 2023 forecast was already below the EUR 15.0 billion target and our model also assumes almost EUR 500 million annual expenses that management considers nonrecurring.

Despite the miss, there was encouraging news as management has begun a “strategic review” of the whole group. Vodafone presented an extensive slide deck where it acknowledged the general challenges of the European telecommunications sector and also admitted Vodafone has underperformed compared with other telecommunication providers. The deck also highlighted that several Vodafone divisions such as the U.K., Italy, and Spain, have sub-WACC returns on capital employed. We have said for a long time that Spain and Italy are value-destructive divisions for Vodafone given the tough competitive dynamics in these countries, a big free cash flow gap with the incumbents, and Vodafone’s weaker network position. In the U.K, although Vodafone lacks its own fixed network, recent price actions (also implemented by BT Group and Virgin Media O2) are helping to maintain EBITDAaL.

Vodafone has taken a few strategic decisions that we believe are positive for shareholders. First, it intends to lay off 11,000 employees during the next three years or 10% of its global workforce. We believe this measure was necessary, as Vodafone’s top line is pressured so cost-reduction measures are required to maintain margins. Second, we believe the strategic review of its Spanish business means a potential divestment. The main challenge we see is finding willing buyers given Spain is a challenging market and neither Telefonica nor Orange could buy the business as this would raise market share concerns among the competition authorities.