Telco 2.0 Transformation Index: Vodafone needs a more convincing growth story
Vodafone is middle-ranking on transformation, roughly at parity with Verizon, behind SingTel and Telefonica but ahead of AT&T and Ooredoo according to our latest Telco 2.0 Transformation Index research.
STL Partners has today launched the most recent update to the Telco 2.0 Transformation Index, featuring the addition of Vodafone to existing analysis on Telefonica, Verizon, AT&T, SingTel and Ooredoo. See here for more on the Vodafone report and join us at the OnFuture EMEA 2014 Brainstorm in London, 11-12 June, to discuss telco and digital transformation strategies.
Figure 1 below, taken from an updated benchmarking report to be launched in May, shows that Vodafone falls short of its European rival Telefonica but matches Verizon - albeit for very different reasons:
STL Partners hypothesises that, based on both the capabilities of and challenges facing CSPs, a score of 75 (the purple dashed line in the chart) is what they should be aspiring towards. STL Partners also recognises, however, that transformation is difficult.
It is clear, therefore, that although Vodafone (like many of its peers) has made a good start in moving to a new, sustainable business model it still has much to do. In particular, Vodafone:
- Scores the lowest out of all CSPs in the Finance domain
- Performs reasonably well for its Value Network but only outperforms Ooredoo in its Service Offerings
- Scores well in Technology but comes out middle-of-the-road for its Marketplace
In order to give some insight into the analysis included in the 148-page CSP Analysis Pack on Vodafone, the following extracts provide a snapshot of the story behind Vodafone's results.
Vodafone's Achilles' heel: struggling headline financials
Vodafone has endured a challenging run of financial results over the last few years. Headline financials, such as revenue, EBITDA and free cash flow, have all shown worrying downward trends. Figure 2 below shows the case for its last three financial years:
In recognition of this, Vodafone has been working hard to define exactly what it wants to look like, and is aware that it needs a compelling and consistent growth story for investors if its share price is not to suffer. Its latest vision is called 'Vodafone 2015'.
Vodafone 2015: is its current growth strategy enough?
Vodafone 2015 is the vision that senior management has been pitching to investors since 2012. It is, at its core, an articulation of a Happy Piper strategy (a 'scale Data company', a 'strong player in enterprise' and a 'cost efficient organisation') with some 'selective' interest in digital services.
The following analysis looks at the first three pillars:
- 'A scale data company' By this Vodafone means a "company that brings data at a cost-efficient level through a variety of screens and pipes" (December 2013 Investor Presentation). This has been reflected in both:
- Increased organic network investment: Vodafone plans to use sizable portion of the Verizon Wireless deal's cash consideration to increase its mobile network investment levels. This, combined with investment in spectrum and the launch of its 'Red' post-play plans suggests that Vodafone has learned from Verizon's successful LTE deployment in the USA: aggressive spectrum investment and network roll-outs to achieve greater coverage than competitors and, subsequently, tying customers to long-term post-pay plans.
- Efforts to grow in fixed: Vodafone has been pursuing wholesale (e.g. Netherlands), self-build (e.g. Portugal) and acquisitions (Cable & Wireless Worldwide, Kabel Deutschland and ONO) in an effort to grow its presence in fixed. This is part of a broader quad-play strategy which it sees as key to reversing its fortunes in Europe.
Although sensible, it is not clear whether these activities alone will prove enough to reverse its fortunes. A key question here, for example, is whether Vodafone's investments in fixed will generate the return on investment it expects - pay-TV, for example, is also open to OTT disintermediation (e.g. by Netflix).
Vodafone has stepped up its game in enterprise following the acquisition of Cable & Wireless Worldwide. Among others, it has given Vodafone a real IaaS cloud play in the UK and a large carrier business (it is now the second largest carrier of international voice worldwide). Vodafone has also worked hard to establish a leading position in the European M2M marketplace in terms of both market share (c. 25%) and big client wins (e.g. Volkswagen/Audi).
With enterprise only representing 25% of its revenues, however, it is not clear whether its enterprise activities are capable of offsetting its struggles in consumer markets.
To help answer this question, the following chart uses data provided in Vodafone's September 2013 investor presentation and makes the following assumptions:
- The model predicts a 3.1% annual growth rate for the next 4-5 years. Of particular note is that the product areas forecast to grow the fastest - Hosting & Cloud (12% YoY) and M2M (20% YoY) - are still only small lines of business and, without a step-change in investment, will remain this way in the near future.
Furthermore, despite growing by 2.2% during its March 2011-12 financial year, Group enterprise revenues stumbled during the next financial year and shrank by 2.8%. This suggests that Vodafone still has work to do here and, ultimately, that its current enterprise activities will not be enough to compensate for continued struggles in European consumer.
- 'A leader in emerging markets' As detailed in our recently published executive briefing comparing Vodafone and Telefonica's market positioning, Vodafone's activities in emerging markets have three key elements:
- 70% of its subscribers are from emerging markets...
- ...but only 30% of its revenues...
This is driven by lower disposable incomes in its emerging markets, reflected in both a considerably higher pre-pay subscriber base and lower ARPUs
- ... and with the majority of both of these coming from its extremely competitive Indian market.
Taken together, these help explain Vodafone struggling headline financials: despite a concerted effort to grow its presence in its rapidly-growing emerging markets, Vodafone remains heavily exposed to the struggling European marketplace.
Vodafone: well positioned to turn its fortunes around and reach the Telco 2.0 'pot of gold'
The results from the Telco 2.0 Transformation Index show that Vodafone, as well as its peers, still has much work to do. Despite its recent struggles, however, Vodafone is well positioned to turn its fortunes around. It has received a substantial injection of capital following the Verizon Wireless deal, enjoys one of the strongest brands of any CSP and has made sensible steps into new opportunity areas (e.g. pay-TV, M2M, cloud) in recent years.
With a more convincing growth story and a rebalancing of its portfolio towards high-growth opportunity areas it has the potential to not only maintain its share price but also increase it by up to 50% - but only if it successfully executes the appropriate strategies.