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

EBITDA growth guidance of 1-5% is in question with group revenues flat to down. Counting AMAP growth in local currencies helps, as will cost control and roaming relief. Sustaining growth in Germany will be key; convergence-led ARPU declines could prove to be something Vodafone can’t afford

Vodafone’s UK business performed strongly in terms of mobile subscribers and fixed business financials, although revenue growth is still lacklustre. Profitability is expected to increase markedly, boosted 10ppts by roaming tariff relief

Although we view Iliad’s business model in Italy as unsustainable, it will nonetheless continue to put significant pressure on Vodafone Italy’s ARPU, which is almost three times that of Iliad’s package

European mobile service revenue growth was down slightly to 0.3% in Q1, with improving trends in all countries other than France, which was down sharply due to the closure of the VAT loophole and intensifying competition

Iliad's launch in Italy was somewhat muted but its focus on straightforward tariffs is likely to hold considerable appeal there, with hidden charges there commonplace and being investigated by the antitrust authority

We expect greater polarisation between the North and South as the year progresses, the key question marks being Vodafone's strategy in Germany, Iliad's traction in Italy, and whether Iliad's revamp in France will lessen or worsen mobile competition there​

Vodafone’s acquisition of Liberty's assets in Germany and Central Europe is likely to face regulatory scrutiny at the EU – and possibly also German – level. We view Vodafone’s expectation of closure in mid-2019 with no remedies as unlikely

The economics of the deal for Vodafone are slim, highly reliant on extracting sizeable synergies, and vulnerable to operational risk and potential remedies for regulatory approval, particularly in Germany

While we see some synergy benefit from combining two cable assets in Germany, we are unconvinced of meaningful benefits from combined fixed/mobile offerings

European mobile service revenue growth was unchanged this quarter at 0.3% growth, despite an easing of the European roaming cuts impact. This was due to intensified pricing competition in Italy and Spain, and EE’s unexpected poor performance in the UK. France and Germany were the only countries to improve their growth, but the improvement in France was largely due to a revenue-boosting VAT loophole

More-for-more price increases continued during the quarter, but their implementation is increasingly dependent on market conditions. Zero-rated streaming offers have continued to launch, but remain the exception rather than the rule.  Given the long implementation periods required for innovative new products at most operators, this may be temporary

Looking forward, overall the outlook looks finely balanced with boosts from the reduced MTR impact in Germany in Q1 2018, an easing in Spain’s retail pricing pressure and EU roaming impact annualising out by Q3 2018. This is countered by France closing its VAT loophole, steep MTR impact in Spain in Q1 2018 and continuing intense competition in Italy given Iliad’s impending launch

European mobile service revenue growth declined this quarter to 0.3%, likely due in large part to the increased negative impact from the European roaming surcharge cuts, which we estimate at around 0.5-1.0ppts for Europe as a whole

The continued growth was supported by continued ‘more-for-more’ price increases coupled with strong data volume growth. Partially countering this, there has been a step up in competition at the low end in some markets, often driven by the smaller operators

Looking forward, the negative EU roaming impact is likely to decline from next quarter given the end of the summer holiday season, and on balance we would expect positive price increase trends to overcome negative low end competitive trends, at least in the short term. This might change in 2018, as Iliad launches in Italy, and recently consolidated operators become more of a threat

Vodafone Europe’s revenue growth was very similar to the previous quarter at just under 1%, but this was impressive given the considerable drag of roaming cuts, with ‘more-for-more’ tariffs coupled with data volume growth driving underlying improvement

Flat-ish revenue was enough to send EBITDA surging 13%, or around 9% excluding some one-off distortions, driven by good cost control and falling handset costs, with this trend previously disguised by profitability issues in the UK

Looking forward, the question is whether Vodafone is doing enough to cope with future competitive threats. Competitive indicators (churn, NPS) have not improved; its new initiatives are quite mixed; and competitive intensity is likely to increase across a number of markets

European mobile service revenue growth witnessed a rare growth spike this quarter, rising to 0.5%, likely due in large part to the reduced impact this quarter from the European roaming cut regulation, but also helped by a slight softening of MTR cuts and continued ‘more-for-more’ price increases

This roaming regulation holiday will end next quarter and the full impact of ‘free roaming’ will be felt, thus the spike in mobile service revenue growth is likely to more-than-reverse

What is likely to prove lasting is the zero-rated data offers introduced in several markets in Q2, which we expect to see more of given their reported success at improving ARPUs

Vodafone Europe’s revenue growth bounced back from a weak previous quarter, but its top 4 markets combined were broadly flat in underlying terms. There are nonetheless promising underlying signs, including reduced churn, (slowly) improving subscriber growth and steady NPS

Vodafone has launched all-you-can-eat social/music/video bundles under the ‘Vodafone Pass’ moniker in several markets, which appear both popular and ARPU-enhancing, and being early to market with such an innovation is laudable

Next quarter Vodafone will be hit by the full force of the EU roaming regulation, but excluding this factor the performance is likely to be steady at least, helped in part by the UK business recovering from its recent weaknesses