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Vodafone Q2 2012 Earnings Analysis

Last Friday, the world’s largest mobile carrier, Vodafone (VOD), reported disappointing second-quarter numbers. While its own share price decline was a moderate 1.7%, Vodafone’s report pushed Telefonica (TEF) into an 8.5% tailspin on Friday. Telefonica’s share price has now crumbled from $30 in early 2010 to just above $11. Obviously, Spain’s economic woes are weighing on the carrier heavily, but why did Vodafone’s earnings report on Friday have such a dramatic impact?

The biggest shock in Vodafone’s spring performance was the 10% revenue decline posted by Vodafone Spain. Investors knew that Spanish mobile market had been softening at an alarming pace, but some of the metrics look considerably worse than expected.

At the end of June, Vodafone Spain had 17.03 million mobile subscribers — nearly 640,000 fewer than in the previous quarter. This means that a sizable chunk of Vodafone’s Spanish sales decline stemmed from consumers actually discontinuing their service, not just moving to cheaper plans. Spain had reported a strangely weak overall April mobile subscriber number, so investors were already nervous about the new trend of mobile subscriber contraction. But few thought Vodafone would lose 3.7% of its entire subscriber base in a single quarter.

This could be viewed as a bad omen for several major European economies next winter. As the austerity-driven recession strangles Southern Europe, the impact on mobile operators and handset vendors could be a lot more dramatic than expected. Vodafone Italy also posted 7% revenue decline, so the Spanish disease is already spreading to another major mobile market.

Vodafone Spain’s decline in voice revenue was steep — sales dropped to 562 million pounds from 590 million pounds during the same quarter last year. Data growth stalled badly. Even with the ongoing transition to smartphones, mobile data revenue grew by just 9 million in a year, reaching 222 million.

Interestingly, messaging revenue increased by 17 million to 318 million. It could be that as financially stressed Spaniards flock to prepaid plans, they are moving an increasing portion of their mobile communication from voice to text. Prepaid consumers now make up more than 38% of Vodafone’s Spanish subscriber base — far above the U.S. average of about 25%.

Retail sales are plunging at an annualized pace of roughly 7% or worse in various European markets, from Spain to Italy to the Netherlands. In some countries, retail sales index readings are sinking below the levels of 2002. It is extremely rare to see retail sales volumes dip under one-decade lows. This is an experiment in deep recession economics — how does consumer behavior change under these extreme circumstances?

All current handset sales projections and mobile data growth assumptions hinge on Europe avoiding an outright depression, because those happen only once or twice a century — yet the continent now wobbles on the edge of the Big D. Greece is undeniably in a depression and Spain may get there during 2012. Italy’s consumer trends are turning catastrophic, with April retail sales plunging 6.8% year-on-year.

Vodafone Spain’s second-quarter report is an unsettling example of how badly mobile spending can deteriorate in an affluent Western market gripped by a debt crisis. We’ll see soon enough if it was a preview of a Europe-wide phenomenon.

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