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Thursday, February 3, 2011

Emerging markets boost Vodafone and Teliasonera

BUYING GUIDE.

Strong demand from emerging markets and from smartphone users helped cellphone operators Vodafone and TeliaSonera lift sales last year and give cause for confident outlooks for 2011.

Vodafone, the world's largest mobile operator by revenue, nudged up its profit forecast for the year to end-March on Thursday, while Sweden's TeliaSonera cheered investors with a $1.6 billion share buyback, lifting its shares 2.9 percent.

Vodafone's service revenues in the last three months of 2010 rose 2.5 percent, in line with market expectations, thanks to strong demand in India and some improvements in Europe, although analysts said concerns remained about the business on its home continent.

Vodafone has made some of the biggest bets on emerging markets, including spending $11.1 billion in India in 2007 to get a 67 percent stake in what is now Vodafone Essar.

While demand is growing rapidly, the Africa, Middle East and Asia Pacific division is still worth only 30 percent of group sales. It grew 9.3 percent on an organic basis in the third quarter, while European revenue edged up only 0.2 percent.

The British-based firm said it now expects adjusted operating profit for the year to end-March to be toward the upper end of its previously stated 11.8 to 12.2 billion-pound range ($19.1 to $19.8 billion).

But Vodafone shares were down 0.9 percent at 175.5 pence by 3:34 a.m. ET, the weakest performer in a flat Stoxx 600 Europe telecoms sector index.

Liberum Capital analyst Mark James said the headline numbers were good but noted that Europe was still tough and particularly so in Spain. Other analysts reckoned that the Vodafone share price was close to its fair value.

Vodafone has also recently restructured its business to now include the faster-growing Turkish market in its European division. In its previous structure, European service revenue was down 0.9 percent, following a fall of 0.8 percent in the previous quarter.

"One of the reasons we are not more enthusiastic on Vodafone is that its European operations, which generate some 70 percent of group EBITDA, are still going backwards," James said.

SMARTPHONES

Nevertheless both Vodafone and Teliasonera said they had benefited from increased demand for internet services. Mobile operators initially struggled to profit from the explosion in data traffic but many, including Vodafone, are now retreating from flat-rate tariffs.

Vodafone's data service revenue rose 27 percent in the last three months of 2010, while Telia said seven out of every 10 phones it sold in Sweden were now smartphones, whose users spend more time surfing and using premium services, boosting revenues.

Vodafone Chief Executive Vittorio Colao said: "Our performance has been driven by the effective execution of our strategy to strengthen our businesses and deliver growth, particularly in data services and emerging markets."

TeliaSonera, Europe's fifth-biggest operator by market value, said it expected sales in local currencies excluding acquisitions to grow 4 percent this year, though the strong Swedish crown could impact reported figures.

"This will mainly be driven by mobile data in the Nordic region, increased market share in Spain and higher mobile penetration in Eurasia," the company said in a statement.

Vodafone's improved outlook followed solid trading in its fiscal third quarter, with strong growth in India and Turkey and improvements in Britain, Germany and South Africa.

However, the Spanish market was worse than expected, with revenues down 7.4 percent.

Its business in Spain, which grew strongly for several years before the recession hit, has been particularly affected by thousands of migrant construction workers leaving the country and cancelling their contracts.

The group did add subscribers in the third quarter but with prices falling due to competition its revenues slumped. In contrast TeliaSonera, which has held onto customers by offering lower rates in the first place, said it expected to grow further in Spain.

TeliaSonera, which has also seen a growing share of income in recent years from markets like Kazakhstan, Uzbekistan and Azerbaijan, said its overall costs would grow less than sales, and its core profit margin should rise compared with 2010.

On Thursday British fixed-line operator BT and Danish operator TDC said they had also benefited from cost cuts and some analysts suggested investors should switch from Vodafone to BT.

(Reuter Writing by Georgina Prodhan; Editing by Greg Mahlich)


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