Vodafone’s leverage issue continues to drive its strategy and operational focus, as evidenced in its H1 results with solid EBITDA but lacklustre revenues.

Its leverage crisis is severely exacerbated by the prospect of a fibre build in Germany as well as a sizeable headwind to its cable business momentum there. Further sell-downs at Vantage will help and we view the prospects of consolidation as slightly improved, with Spain the most promising option.

Growth in the UK appears to be on hold and the outlook is mixed with VMO2’s notice for early termination for its MVNO, ongoing B2B weakness expected but significant inflation-linked price rises on the cards.

European mobile growth was essentially zero year-on-year—a significant improvement thanks to annualisation of the pandemic but there is little evidence of the reversal of its negative impacts.

Italy saw the biggest improvement in its underlying trend as the pandemic continued to suppress Iliad’s momentum, while elevated competitive tension in Spain and France ate into their annualisation boost.

Mobility and flight data suggests that Q3 will evidence a bigger boost from renewed travel than in Q2—positive for roaming revenues—but that the improvement in mobility will be weaker than in the June quarter.

Vodafone’s growth this quarter was a touch disappointing; the annualistion of the COVID hit was a clear boost but no evidence of any tailwinds. The 1.1% growth in the European markets should be the real focus for investors.

We see some evidence of positive initiatives from Vodafone such as its new EVO tariffs in the UK but it still has much to prove on operating momentum, especially in Germany.

There are signs that Vodafone is slow-pedalling in some markets and with demanding EBITDA targets and with leverage still finely balanced, we expect this focus on profitability to continue. The UK may be a special case.

Mobile growth dipped again to -3.3% for what we hope is the final time as widespread lockdowns impacted paid-for usage in most countries.

BT and Vodafone joined the other European MNOs in guiding to improving trends in 2021—expecting EBITDA momentum to be 7-10ppts better—slightly ahead of the 5-7ppts for the European operators.

We may even see positive revenue growth next quarter thanks to the simple annualisation of the first lockdown, with the UK the most to gain and Germany and Italy the least. Investment is creeping up too with higher capex guidance and better 5G momentum.

Vodafone’s additional investment to boost a growth story that isn’t yet delivering failed to impress investors who value cashflow much more than promises for tomorrow, particularly given Vodafone’s track record with restructuring plans and product development.

It’s a surprising time to be splashing the cash with leverage still finely balanced and riding on Vodafone delivering a 10ppt turnaround in EBITDA growth next year vs last. Commercial activity looks set to continue to be dominated by EBITDA promises.

Selling a stake in Vantage Towers (temporarily) solved a leverage problem, but is creating a control problem, with the uncertain level of its future capex adding to investor concerns.

Europe’s larger MNOs are falling over each other to demonstrate support for OpenRAN, which has become a primarily operator-driven standards initiative, with governments also firmly behind it.

This is driven by a desire to improve equipment interoperability from the current de facto monolithic standards, improve supplier diversity, and ultimately drive down cost.

While some movement towards interoperability is perhaps overdue, OpenRAN is not a panacea, and some trade-offs between price, performance, supplier diversity and reliability have to be accepted.

Generating cash is top of Vodafone’s agenda right now, and we may be seeing early signs of that driving operational tactics ahead of resolving its leverage crisis through either an IPO of Vantage or a sale of its Iberian assets.

EBITDA growth would really help. Analyst forecasts of +4% for next year are not supported by recent history and a simple bounce-back of roaming revenues should not be assumed.

Q3 results were a mixed bag with the very slight improvement in revenue trends accounted for by easing roaming pressure. Green shoots in German fixed is a highlight, with growth in UK mobile a touch disappointing.

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