Higher data revenues save the day

EUROPEAN telecoms firms are having a torrid time. Earlier this month, Deutsche Telekom and Telecom Italia failed to hit expectations for first-quarter earnings, while Dutch telco KPN and Belgacom both issued profit warnings.

The fact that Vodafone met consensus for earnings and beat at the top line while its rivals flounder means it is probably stealing market share in Europe. That is certainly true in Italy, where Vodafone has replaced Telecom Italia as the Number 1 in mobile. Vittorio Colao, a reservist in the Italian army, will view that achievement with personal pride.

It isn’t all plain sailing. Spain, a constant source of woe, saw organic service revenues fall by 6.9 per cent while growth in the UK was 4.7 per cent, below consensus of 6.5 per cent.

No-one expects revenues from voice or text messages to grow significantly in mature markets so it is reassuring to see that data revenues were up 26.4 per cent. The big question is whether data will cannibalise voice calls and texts, rather than complementing them. On that, the jury is out, but Vodafone has had success so far by selling carefully-crafted bundles of all three services.

Vodafone trades at a premium to its European peers, around 5.8 times earnings forecasts for this year against a sector average of 5.2. That reflects its presence in India and the access it gets to US businesses through its Verizon joint venture.

Whether it deserves a richer rating comes down to whether you think Vodafone is a utility company or whether it has growth prospects.

We reckon the democratisation of the smartphone, leading to an explosion of data usage in India, means there is growth to be found. Vodafone’s shares have had a bad run in recent weeks due to the poor numbers from rivals, only partially corrected by yesterday’s small rally. There is more value to be had.