Vodafone hit by 5.9bn pound impairment charge

Telecoms giant Vodafone has plunged into the red after being hit by a huge impairment charge during the half year ended September 30th.

The £5.9bn impairment charge related to its operations in Spain and Italy as a result of challenging market conditions and adverse movements in discount rates in that region.

This heavily contributed to a pre-tax loss of £0.49bn for the period, compared with an £8bn profit last year.

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Revenue for the period fell 7.4% from £23.52m to £21.78bn year-on-year, with the decline partially offset by a drop in the cost of sales, from £15.79bn to £14.76bn, resulting in gross profit of £7.02bn (2011: £7.7bn).

Despite this, the company expects operating profits for the full year to be in the upper half of the range of £11.1bn to £11.9bn previously indicated.

Vittorio Colao, Group Chief Executive, said: "Overall performance in our controlled operations in the first half of the 2013 financial year has been slightly below our expectations, mainly as a result of a further weakening in the macroeconomic environment. However, this has been offset by a very strong performance by Verizon. We expect the environment to be similar in the second half of the 2013 financial year."

"We now expect [...] free cash flow to be in the lower half of the range of £5.3bn to £5.8bn indicated in May 2012. We expect the group EBITDA [earnings before interest, tax, depreciation and amortisation] full year margin decline to continue its improving trend year-on-year, excluding the impact of mergers and acquisitions and restructuring costs."

For the six month period, organic service revenue growth dropped by 0.4%, dragged by Southern Europe where organic revenues declined 9.8%. This trend worsened during the second quarter where organic service revenue growth fell by 1.4%, again dragged down by Southern Europe revenues dropping 11.3%.

Overall group service revenues fell by 7.9% with Southern Europe dropping the most at 18.1%, Northern and Central Europe falling 2%, and Africa, Middle East and Asia Pacific falling 5.1%.

Vodafone continues to be highly cash generative with free cash flow of £2.2bn for the six months together with £2.4bn dividend due from Verizon Wireless by the end of 2012. After it receives this a £1.5bn buyback will commence.

The group will pay an interim dividend per share of 3.27p, up 7.2% on the same period last year.

CM