Vodafone reports decline in quarterly revenues, confirms forecasts -UPDATE

Vodafone on Thursday posted a worse than expected drop in group revenue for the last three months of 2012, blaming difficult market conditions in Europe. Analysts, however, seem to have expected worse. As well, the company reiterated its forecasts for operating profits. The FTSE 100 telecoms company said revenues fell 1.8% to £11.38bn year-on-year for the quarter, experiencing the biggest decline in the take up of services in Europe.Emerging market operations continued to grow, but it was offset by macroeconomic regulatory and competitive pressures across Europe causing group service revenue - which includes voice, data and messaging - to drop by 2.6% to £10.37bn. Southern Europe services were hit the hardest, plummeting 11.9% to £2.3bn, as consumers reduced spending amid slowing economies. In Italy service revenue tumbled 13.8%, due to lower mobile termination rates and a poor economic climate. Spain was down 11.3% after experiencing a drop in customers following the temporary removal of handset subsidies, competitive pressures in the value segment and the increased popularity of converged consumer offers in the market. On the up side, Africa, Middle East and Asia Pacific service revenue jumped 2.7% to £3.14bn. Verizon Wireless, the company's joint venture with Verizon, continued to perform well as service revenue grew 8.7%, bolstered by expanding connections base and increased smartphone penetration. In the US the venture added more than 2.2m net mobile retail connections during the quarter. The US mobile network operator provided a £2.4bn dividend, which helped Vodafone reduce net debt to £23.3bn. "Our results continue to reflect very difficult market conditions in Europe," Chief Executive, Vittorio Colao, said. "We are addressing this through firm actions on cost efficiency, and continuing to invest in areas of growth potential. "We continue to make progress in our Vodafone 2015 strategy, with good revenue growth in data and emerging markets, the launch of LTE services in another four markets and the acquisition of new spectrum."Company reiterates forecasts for operating profitsThe company reiterated that it expects adjusted operating profit in the upper range of £11.1bn to £11.9bn for the 2013 financial year, while projecting free cash flow at the lower range of £5.3bn to £5.8bn.The results follow market forecasts of "growth deterioration" at the firm and a reliance on Verizon Wireless for revenues.Precisely for that reason, it is of import to point out that on the conference call the outfit's Chief Financial Officer, Andy Halford, said Vodafone's cash-flow will be adequate to cover its future dividend payments.Last month Deutsche Bank lowered its recommendation from 'buy' to 'hold' citing concerns about the telecom company's worsening cash returns. "We forecast growth deterioration through calendar 2013 with the outlook for financial FY14 set to confirm declining free cash flow (FCF), no further dividend-per-share growth and a scaled down buyback to avoid increased leverage, " the broker said.Nomura raises concerns on dividendVodafone's share price jumped 1.85% to 173.50p at 12:40. However, despite all of the aforementioned Nomura highlighted concerns with the company's dividend on the back of accounting changes to be implemented next year."Vodafone's board will reconsider uses of cash flow following the expiry of its three-year dividend commitment, and we believe it may baulk at paying a dividend not covered by controlled cash flow. We reiterate our concerns for income investors and lack of certainty over the forward dividend is an overhang for the shares, in our view," the Japanese broker added.The broker expects a deteriorating top line to bring further earnings pressure for the consolidated assets. It retained its 'neutral' rating and 195p target price for the stock.In a more constructive manner Bank of America Merrill Lynch pointed out that: "recent Euro strength and strong US EBITDA growth suggest an end to earnings downgrades. Valuation remains quite attractive (10.4x March 14E P/E)."RD