Vodafone warning deepens telecom clouds

LONDON - British mobile phone giant Vodafone warned on Tuesday that full-year sales would disappoint the market, sending its share price tumbling one week before the exit of chief executive Arun Sarin.

Vodafone said in a trading update that annual revenues would be at the lower end of expectations because of difficult trading conditions, particularly in Spain.

In reaction, the group's share price plunged 16% at one stage but later recovered some lost ground to finish down 13.57% at 129 pence while the broader market lost 0.74%.

The telecoms sector was also dragged lower after Ericsson, world leader in mobile phone network equipment, reported a 70% collapse of net profit for the second quarter, citing a slowdown in western Europe.

The blizzard of negative news comes exactly one week ahead of the departure of boss Sarin, who will hand over to his deputy chief executive Vittorio Colao after five years in charge.

"The CEO would not have wished for these numbers as a swansong, nor the accompanying share price performance," said Richard Hunter, analyst at Hargreaves Lansdown.

Sales at the bottom end

Vodafone said on Tuesday that full-year sales were forecast to be at the bottom end of its guidance range of between £39.8-40.7 billion (€50-51 billion, $79-81 billion).

The company partly blamed the outlook on recent economic weakness, especially in Spain, and lower-than-expected equipment revenue. Activity in Spain had been "particularly impacted by economic and competitive effects."

Spain, like the rest of the Eurozone, has been hit by soaring oil and food prices which are fuelling inflation, while its key building sector has been hurt by rising interest rates and the international credit crunch.

Growth in the first quarter was just 0.3% over the previous three months, and some analysts have warned the country could slip into recession, which is defined by two consecutive quarters of negative growth.

The news from Vodafone hit the price of shares in Spanish telecommunications group elefonica, which dived 7.35% to €16.01. The wider Madrid stock market lost 2.48%.

"The Spanish and UK telecoms markets, resilient to the economic slowdown to date, finally look to have cracked," said Collins Stewart analyst Mark James in London.

Customer base swells

"It seems likely that earnings expectations, regardless of management's statements, are likely to get scaled back."

On the brighter side, Vodafone added that group sales jumped by 19.1% to £9.8 billion in the three months to the end of June, compared with the same period of 2007.

And sales from its Emerging Markets, Asia Pacific and Affiliates (EMAPA) division surged by 30.5% to 2.64 billion pounds, driven by Indian revenue growth of 50%.

The group's customer base swelled by 8.5 million to 269 million people in the quarter.

"Notwithstanding this more challenging operating environment, we continue to benefit from a diversity of assets and services, with strong revenue growth in EMAPA and another good quarter of data revenue growth offsetting weakness in Spain," said Sarin in the release.

"Whilst 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."

In recent years, Vodafone has expanded into emerging markets across Africa and Asia, as it looks to offset flagging sales and fierce competition in maturing Western markets.

Vodafone announced in May that Arun Sarin would leave the group at the end of July, after returning the group to profit in 2007/2008.

Sarin had said that he had achieved all he set out to do and "felt the time was right" to depart.

Source: AFP

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