Vodafone cut its revenue outlook for the second time in four months

Vodafone aims to cut costs by £1 billion

Reuters

Vodafone Group on Tuesday cut its full-year revenue outlook for the second time in four months but said it would maintain profit and increase free cash flow by cutting £1 billion a year in costs.

Investors and analysts welcomed the focus on cost controls and on improving performance, instead of on growth through expansion.

Shares of Vodafone, the largest mobile phone company in the world, rose 6.7 pence, or 6 percent, to close at 115 pence, or $1.80, in London as the broader market fell.

Vodafone also reported its first results under a new chief executive, Vittorio Colao. First-half results met expectations, but the company said conditions were challenging.

"Vodafone has delivered a more material change to strategy than we expected, with more of a focus on cash and dividend than there has been in the past," Dresdner analysts wrote in a note.

"This is a fundamental change which, when combined with earnings momentum from stable operations, lower tax rates and favorable foreign exchange rates, supports a good chance of a re-rating for the stock," the analysts said.

Vodafone said it now expected full-year group revenue of £38.8 billion to £39.7 billion.

The company had already cut its expectations in July to the bottom of a previous range of £39.9 billion to £40.7 billion. It slightly raised its forecast for free cash flow.

"Operating conditions are expected to continue to be challenging in Europe, given ongoing competitive and regulatory pressures and recent economic conditions in certain markets," the company said. It said it expected continued strong growth in emerging markets.

The company raised its interim dividend 3.2 percent and said it would introduce a "progressive" dividend policy where growth reflected underlying sales and cash performance.

First-half revenue was slightly ahead of expectations, up 17.1 percent, at £19.9 billion, and core profit matched the average forecasts of analysts.

Vodafone said it expected "to reduce current operating costs by approximately £1 billion per year by the 2011 financial year to offset the pressures from cost inflation and the competitive environment and to enable investment in revenue growth opportunities."

Vodafone declined to say whether it would cut jobs, but it said it could look at outsourcing to cut costs.

Vodafone said it had reviewed its strategy because of the more difficult economic environment. The company said it would focus on increasing mobile data services and on emerging markets.

"We are already represented in most of the key emerging markets, where significant growth is expected in the coming years," the company said. "Our principal focus now will be on execution in these markets."

Analysts at Cazenove said the new strategy made sense, and others welcomed the suggestion that Vodafone would focus on its current markets rather than chase acquisitions.