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Vodafone's Statements Suggest Too Much Optimism

November 15, 2012 | About:
GMI Ratings

GMI Ratings

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Vodafone Group Plc (VOD) adjusted its earlier estimates about the value of operations in Spain and Italy downward by £5.9 billion. While the British mobile phone giant clearly had no power to prevent the European crisis, its financial statements have contained warning signs that its managers tend to present their performance in the best possible light at the risk of having to disappoint in the long run.

Vodafone said on Nov. 13 that it swung to a £1.89 billion loss during the six months ended Sept. 30 from a profit of £6.64 billion during the same period last year. Sales fell more than forecast in the second quarter, according to the Guardian. Vodafone’s CEO Vittorio Colao described his company’s performance in an official statement as continuing “to make progress on our strategic priorities over the last six months, with good growth in data and emerging markets in particular. In the short-term, however, our results reflect tougher market conditions, mainly in Southern Europe.” He expressed his confidence about the long-term future, given factors such as growing exposure to the economies of developing countries and "continuous investment in high speed data networks."

Vodafone also trumpeted its £2.4 billion dividend due from Verizon Wireless by the end of 2012, which is its reward from a joint venture with Verizon Communications Inc. (VZ) in which the British firm has a minority stake. Does this give CEO Colao an opportunity to put money toward growing Vodafone's operations – or perhaps shoring up its ailing sales in Europe? Vodafone is planning to buy back £1.5 billion of shares. While removing the supply of Vodafone stock in the market will boost its earnings per share in the short-term, this move is unlikely to impact business operations in the long run.

Vodafone’s £1.1 billion of share buybacks during the six months ended Sept. 30 are among the triggers that worsened its most recent AGR ® score to a 15 as of June, indicating higher accounting and governance risk than 85% of comparable companies. In December Vodafone’s financial statements reflected an AGR score of 51, indicating average risk.

Another of the more recent contributors to Vodafone’s low AGR is that the trailing 12-month average of its sales amounted to £46.42 billion as of June 30, or 1.32% of total operating expenses. Before cutting costs, Vodafone’s sales amounted to 1.25% of its expenses as of December. This suggests that the company has improved its efficiency and already outperformed in this area compared to the industry median, which has gone no higher than 1.17% in the past three years.

Meanwhile other indicators suggest that Vodafone has been less efficient than its rivals for at least the past three years. The company generated only around 32 pence per British pound it held in assets as of June 30, compared to the industry median of 60 pence.

This mystery doesn’t necessarily mean that Vodafone has done anything wrong. Indeed, it is rated “C” on its environmental, social and governance (ESG) risk overall, in part due to its being a good citizen in areas such as its disclosure about greenhouse gas emissions and developing an alternative energy program.

But investors should scrutinize Vodafone’s financial statements carefully and prepare for the possibility of more surprises. Vodafone said 35% of its assets consisted of goodwill as of September 2009. The company ended up making numerous adjustments to such estimates in recent years, noting market challenges ranging from Greece’s crisis to price competition in India. Vodafone has taken impairment charges related to European operations in every year since fiscal 2009 besides fiscal 2010, the Wall Street Journal noted. After acknowledging such mishaps for which the senior management is clearly not to blame, Vodafone’s goodwill amounted to 24% of its total assets as of Sept. 30. While this proportion is much closer to the industry median of 19% as of June 30, it remains a hefty quantity of assets that are less concrete than cell phones.

It remains anyone’s guess whether Vodafone will have another unplanned experience in the coming years in Spain and Italy. But CEO Colao has expressed his confidence, and indications are that he might on occasion have too much.



Region: Western Europe

Country: United Kingdom

Sector: Telecommunications Services

Industry: Wireless Telecommunications Services

Market Cap: GBP 83,364.6 million (Large Cap)

AGR Rating: Aggressive (15)

ESG Rating: C




Rating: 2.9/5 (8 votes)

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