Mobile growth improved very marginally to -3.6% this quarter as roaming revenues were harder hit and competitive intensity bounced back, but usage recovered from the lockdowns in Q2 and cuts to intra-EU calls were annualised.

Italy’s fortunes took a turn for the worse as roaming hit particularly hard and Iliad resurged. After a spate of downgrades to the outlook last quarter, there were some tentative upgrades in Q3 although the tone remains cautious.

The diminished drag from roaming is the primary positive driver from here. Although lockdowns of some degree are in place in Q4, their impact will be less severe than those in Q2.
 

Vodafone’s performance this quarter was hit both by COVID and an underlying deterioration in its operational momentum—disappointing given regulatory easing and easier comparables.

Vodafone’s guidance has been more prudent than most going into this pandemic and these results support that cautious stance. Whether it’s a case of Vodafone underperforming or the sector being less resilient than expected will emerge over the coming weeks.

The IPO of Vodafone’s towers business is imperative to maintaining its leverage targets and dividend. It will need to sell a chunky slice of equity and realise a hefty multiple in challenging market conditions.  The profile of the asset for sale will help but it all remains very finely balanced.

European mobile service revenue growth strengthened very slightly to -0.3% this quarter but, with many positive and negative factors at play, it would be wrong to conclude that we evidenced a convincing improvement in momentum.

Most operators have reiterated their financial guidance in spite of COVID-19 but there is caution from Vodafone and those exposed to sports rights (BT and Telefonica).

The outlook benefits from continued lockdown measures (reducing churn and spin-down) and the annualisation of some financial drags from the middle of next quarter. However, competition in Spain remains intense and the sector is exposed to any economic downturn.

Vodafone’s financial metrics appear to be slowly ticking up and it is making some progress in narrowing its performance gap to peers. Signs that it may be moving away from a discount-led convergence strategy in Germany are very positive.

Organic EBITDA growth is highly flattered by one-off items and, as is frequently the case, even this headline EBITDA growth for FY20 is wiped out by currency depreciation in ‘Rest of World’ countries.

This lack of real progress on EBITDA and FCF and the muted outlook for both exacerbates Vodafone’s tight leverage position. There seems very little prospect of it unsettling the O2/Virgin Media JV in the UK.
 

European mobile service revenue growth improved by 1ppt to -1.2% primarily as a consequence of diminished competitive intensity in France. Trends elsewhere were largely flat.

The mobile sector is playing an important role in tackling COVID-19 and is likely to be relatively resilient in the short term with a broadly neutral financial impact. Longer term it will be exposed to the fortunes of the economy.

There are reasons to believe that the improvement in trends evidenced in the last quarter may continue as churn reduction takes the heat out of some markets, cuts to intra-EU calls annualises out and for most countries, end-of-contract notifications will only begin to impact in 2021.
 

Despite two decades of online disruption, the UK remains reliant on traditional platforms and brands across the media sector more so for older cohorts, but also for younger generations

13% of adults still do not use the internet and, in reality, an online only media ecosystem remains a distant prospect

Traditional providers, particularly within TV, radio and news, look set to endure for the long term , aided by the trajectory of the UK’s ageing population

Vodafone’s revenue performance remains decidedly lacklustre. Italy and Spain are struggling to bounce back, Germany is still languishing, and the UK’s 0.6% service revenue growth is the highlight of the quarter.

Liberty Global’s assets are disappointing both in terms of opening financials (revenues and EBITDA 8% and 12% lower than expected respectively) and outlook (now growing at half the rate at the time of deal announcement and guidance for Germany as a whole to be ‘flattish’).

Vodafone’s guidance for a pickup in revenue growth to more than 1% in Q4 is encouraging but these are very tentative steps forward in challenging times.

Vodafone’s deteriorating financial performance is as much due to an increasing margin of underperformance relative to its peers as to challenging markets such as Italy

A strategic refocus on operational performance is long overdue and seems largely sensible, save for the continued push for discount-led convergence products which are driving underperformance

Although Vodafone posted 3% organic EBITDA growth for H1 of this year and is guiding to same for the full year, we view this definition as overly flattering with true EBITDA performance flat and revenues in decline

European mobile service revenue growth was sharply lower this quarter dropping to -0.7% after two years in positive territory, owing to weakness in the southern(ish) European markets of France, Italy and Spain

Iliad has strong momentum in Italy and we expect ARPU dilution to worsen into Q3, with the subscriber loss impact also growing.  Any loss of traction for Iliad is likely to drive another round of price cuts

We expect continued north/south divergence in Q3 with the anniversary of the European roaming cuts boosting the UK and Germany in particular whilst the outlook for Southern European operators remains challenging

Audiobooks are growing fast, driven by smartphone adoption and better supply, as well as interest from people who don’t usually buy books, such as young men

The sector is dominated by the presence of Audible, Amazon’s audiobook publisher/retailer, which has driven growth of audiobooks but put publishers under pressure. Its strategy is a lesson in Amazon’s approach to media

Audio is an opportunity to sell to new customers, but publishers must acquire and use rights responsibly, and experiment while not letting the audio tail wag the print dog