Vodafone Group Plc (ADR) (VOD)

Vodafone Group (Vodafone) is a mobile telecommunications company that has its operations spanning across Europe, the Middle East, Africa, Asia Pacific, and the U.S. through its subsidiary undertakings. Vodafone Group generates revenues through two business divisions: mobile telecommunications (95.6% of the total revenues during fiscal year 2006) and other operations (4.4%).

The company has recorded weak margins and returns in the last few years. Its operating margin and net profit margin for the period 2002-2006 were significantly lower than corresponding industry averages. Weak margins and returns indicate a higher cost base, and the company’s inability to manage assets profitably, which can adversely affect its long-term profitability and investor confidence.

The company has seen a drop in the average revenues per user (ARPU) and increase in churn rate across most of its key markets like Germany, Italy etc. In fiscal 2006, the company’s ARPU was down and the churn rate was high as compared to that of fiscal 2005. However, collectively, these are mature markets, which constitute a major part of the company’s total revenue.

Finally, Vodafone has a significant amount of indebtedness and most of it is long term.
For the past several years, the company has been incurring losses and as a result, the company might not be able to pay off its interest expenses. This could also put Vodafone at a relative disadvantage against its competitors, thus, impairing its ability to make investments and obtain additional financing for capital expenditures, acquisitions, or general corporate or other purposes.

The company largely operates in the matured markets of the world, which tend to have intense competition and relative pricing pressures, thereby, leading to squeezed margins. The company is no different from other telecom operators and hence it also poses a serious problem relating to its future-outlook.