(Bloomberg) -- Vodafone Group Plc’s largest market, Germany, is starting to feel the pain from a recent law change that could see the telecommunications firm lose millions of customers.
Germany barred housing associations from bundling TV and internet subscriptions with rent, effective from July. Service revenue in the country, which accounts for more than a third of Vodafone’s group revenue, decreased by 1.5% in the first fiscal quarter, the company said on Thursday. Vodafone has previously warned that it could lose half of its 8.5 million household contracts because of the law change.
The past year has marked a significant transition for Vodafone as Chief Executive Officer Margherita Della Valle embarked on a turnaround strategy, including selling off underperforming markets, cutting 11,000 jobs, and scaling back a sprawling empire that at one point stretched from the US to Africa. Since she formally took the reins last April, she’s overseen the sale of the company’s Spanish and Italian businesses and an attempted merger with CK Hutchison’s Three, currently undergoing reviews from the UK competition authority.
“This is going to be a year of transition, because Germany is going to be a bit of a drag due to this expected low churn,” Della Valle told reporters in a call. “But we have reconfirmed our guidance today for the group, which is a guidance of growth.”
Service revenue grew 5.4% to €7.5 billion ($9.6 billion) in the quarter, the company said, beating the €7.36 billion average estimate of four analysts in a Bloomberg survey. Results were buoyed by growth in Africa and Turkey, but it wasn’t enough to impress investors. Shares fell 2.19% to £68.90 at 9:32 a.m. in London.
Della Valle stressed the need for the UK to approve the merger with Three so the mobile phone company can better invest in the country’s infrastructure. Competition authorities have raised concerns that the merger would increase customer prices and lead to lower investment levels.
“This decision is a big fork in the road,” she said in a call with reporters on Thursday. “Without a step change in investment, the UK risks slipping even further behind.”
UK revenue grew 2% this quarter to €1.43 billion, but fell slightly short of the average analyst estimate of €1.44 billion. Analysts have warned about the impact of a rule change from communications regulator Ofcom, which has announced plans to ban mobile, broadband and pay TV companies from imposing mid-contract, inflation-linked price hikes. The change comes into effect in January.
Vodafone reiterated guidance of adjusted earnings before interest, taxes, depreciation, amortization after leases of €11 billion and adjusted free cash flow of at least €2.4 billion.
The results were “better-than-expected,” Bloomberg Intelligence’s Erhan Gurses wrote in a note, putting the company on track for a Ebitdaal improvement at the end of the fiscal year, “although a sluggish turnaround in Germany (45% of Ebitda) may fuel concerns about the midterm outlook.”
Analysts from Berenberg and Goldman Sachs called the results slightly disappointing, mostly due to the situation in Germany and a miss on the UK’s organic growth.
(Updates with context and CEO comment)
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