Case study analysis

Vodafone was the biggest faller on the FTSE 100 on Tuesday as investors reacted to lower than expected profits, a decline inrevenues due to the impact of pandemic travel bans and a drop in smartphone sales.

While Vodafone swung back to the black last year, reporting profits of 536m (461m) compared with a loss of 455m in 2019, the result was at the lowest end of the companys guidance and disappointed City expectations. Shares fell 9% to 129p.

The mobile operator reported a fall in total group annual revenues of 2.6% to 43.8bn, blaming factors including a drop in roaming revenue the charges some customers pay when using their phones abroad as pandemic restrictions halted most travel and tourism.

People being less mobile in general is bad news for mobile telecoms groups like Vodafone, said Russ Mould, the investment director of AJ Bell. Vodafone saw its revenue and earnings hit by lower roaming charges as individuals were unable to travel thanks to the pandemic. Handset sales have also slumped, suggesting were not so bothered about having the latest, fancy new phone when were stuck at home.

Nick Read, the Vodafone chief executive, said the company was in talks with BT about potentially partnering in its new plan to extend its rollout of full fibre broadband from 20m to 25m premises by the end of 2026. Read added that Vodafone was in talks with many players about its plans for full-fibre broadband expansion, not just BT.

The companys biggest market, Germany, which accounts for 31% of total revenues, performed strongly, increasing total revenues by 7.5% to 13bn last year. In the UK, which accounts for 13% of Vodafones business, revenues fell 5% to 6.1bn.

Vodafones European mobile customer base grew by 2% to 65.4 million, with the rate of customers leaving the company falling from 14.6% to 13.7%, as broadband customer numbers rose from 25 million to 25.6 million.

Investors were also unhappy at an increase in annual capital expenditure, up from 7.85bn to 8bn, which will hit its free cash flow. Read said the investment in 5G and broadband infrastructure would pay off over the longer term.

The world has changed, said Read. The pandemic has shown how critical connectivity and digital services are to society. Vodafone is strongly positioned and through increased investment, we are taking action now to ensure we play a leadership role and capture the opportunities that these changes create.

Q: Critical Analysis this article with reference of Reactions of Capital Markets to Financial Reporting