Vodafone expects 2019 earnings to drop as new accounting measures dent revenues

Vodafone PLC (LON:VOD) slipped back on Friday after the group said it expects 2019 earnings to be “slightly lower” as the adoption of IFRS 15 accounting practises means it has to exclude UK handset financing from the numbers. 

The IFRS 15 rules, which have replaced IAS 18 standards and require companies to recognise certain revenues differently, dented Vodafone’s revenues in the third quarter ended December 31.

READ: Vodafone and O2 extend their network sharing deal to cover 5G, stepping up the battle with BT

Group revenue fell 6.8% to €10.9bn in the quarter from €11.8bn a year ago.

Vodafone said foreign exchange headwinds and the sale of its stake in the Qatar business to joint venture partner, the Qatar Foundation, early last year also dragged revenue lower in the period.

Organic service revenue on an IFRS 15 basis rose 0.4%, compared to a 0.3% increase in the previous quarter.  But on an IAS basis, organic service revenue growth slowed to 0.1% from 0.5% in the second quarter.

Service revenue in Europe fell 2% on a reported basis to €7.5bn or dropped 1.1% on an organic basis, led by declines in Italy, Spain and the UK.

The Italy and Spain businesses continued to be affected by tough price competition in consumer mobile. The UK was hit by exclusion of handset financing as well as lower business and mobile virtual network operator revenues in mobile.

In the rest of the world, reported service revenue decreased 7.2% to €2.2bn but organic service revenue gained 4.9%.

Mobile contract churn improves

Vodafone said mobile contract churn reduced by 2 percentage points compared to a year ago. The group added 747,000 mobile contract customers and had 341,000 broadband net additions.

The company hopes its plans to extend its existing UK network sharing agreement with Telefonica’s O2 to include 5G services will attract more customers.

“Lower mobile contract churn across our markets and improved customer trends in Italy and Spain are encouraging, however, these have not yet translated into our financial results, with a similar revenue trend in Europe to Q2,” said chief executive Nick Read.

“We enjoyed good growth across our emerging markets with the exception of South Africa, which was impacted by our pricing transformation initiatives and a challenging macroeconomic environment.

“Overall, this performance underpins our confidence in our full-year guidance.”

Full year guidance 

For the 2019 financial year, the firm expects organic service revenue to be “slightly higher” and earnings (EBITDA) to be “slightly lower” under IFRS 15.

Organic adjusted EBITDA is still expected to rise 3% with free cash flow generation of about €5.4bn. 

Having dropped sharply on Thursday, following the release of disappointing results from Vodacom, shares in Vodafone were only 0.9% lower in early trading on Friday at 142.70p.

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Story by ProactiveInvestors