VMO2’s Q3 results were mixed, with underlying revenue and EBITDA slightly improving (but still negative), subscriber momentum slightly improved, but customer service issues still apparent.

The company’s broadband momentum is clearly being significantly curtailed by altnet gains (and Openreach overbuild), with substantial network expansion resulting in anaemic subscriber growth.

A return to growth in 2025 certainly looks possible, but it will depend on customer service issues being resolved, and industry consolidation going VMO2’s way. 

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We view the CMA's proposed remedies to the Vodafone/Three merger as workable, but not necessary.

While acknowledging the reassurance that short-term pricing commitments can provide, we are of the view that going too far risks distorting a highly competitive market.

Aggressive MVNO pricing commitments, in particular, could amplify a significant drain on the operators' capacity to invest, threatening the network promises that the companies are making.

Service revenue growth dropped off by 2.7ppts this quarter, and into negative territory, as operators in all markets suffered weaker growth
 

Operators in France and the UK implemented price increases this quarter but re-contracting absorbed any positive revenue impact. In Italy, regulatory intervention thwarted operator plans to raise prices
 

Increasing competitive intensity in France and Germany comes at a time when operators can ill-afford ARPU dilution and high churn
 

SpaceX and its Starlink satellite network have made headlines dangling a vision of free emergency service coverage direct to all mobile devices, undoubtedly connected to its ongoing battles for FCC approval.

Starlink is the clear leader in the D2D space and almost certainly will be the first to launch its service. AST Space Mobile, backed by various mobile operators (including Vodafone) is lagging significantly behind, having not yet launched any commercial satellites.

The UK is however a relatively unfavourable geography for D2D, due to its high latitude and relative density, and we don't expect any launch of commercial service in the UK by Starlink or AST Space Mobile before 2026.

Service revenue growth dropped off by 5ppts this quarter to -1% as lower in-contract price rises hit.

The outlook for 2025 is marginally brighter than it was last quarter as new price-increase regulations raise the average in-contract price increase for customers.

The CMA is set to deliver its preliminary findings on the Vodafone/Three merger in September. If it is not approved, we expect both parties to significantly change their strategies to be viable in the UK market.

If the Vodafone/Three merger is blocked we envisage a significant cost reduction push from Vodafone, with a highly uncertain path to acceptable returns.

H3G's capex would need to more than halve from 2022 levels to get its finances onto anything like a reasonable footing. A commensurate scale-back of its network, and commercial, ambitions would also be required.

With H3G likely to enact a slow walk from the UK under such a scenario via a hybrid MNO/MVNO strategy, the UK would end up with three nationwide mobile networks either way, just lower quality ones if the deal is blocked—with a real cost to consumers and the government's growth agenda.

Handset sales by UK mobile operators have been weak for some time as customers keep their phones for longer due to affordability issues, slowing technological advances, and the spread of longer handset contracts.

Though margins on handset sales are often slim, their erratic nature can lead to big EBITDA hits—we estimate that the recent 20% declines at VMO2 and Vodafone have had a 6-9ppt impact on EBITDA.

The operators have an opportunity to improve their fortunes in the refurbished handset market where take-up is low, but both consumer interest and margin potential is high.

VMO2 survived the hammer blow of lower inflation-linked mobile price increases in Q2 with substantially unchanged revenue and EBITDA growth, helped by improving broadband ARPU

However, both mobile contract and broadband subs suffered declines, likely driven by issues with serving existing customers as well as attracting new ones, and these trends have to improve for the company to return to top and bottom line growth

Guidance implies that EBITDA growth will worsen in H2, but this would be good news in our view if it is driven by expenditure to support improved subscriber growth across broadband and mobile 

BT’s revenue growth in Q1 was hit by lower price increases, but positive EBITDA growth was achieved thanks to strong cost control as inflationary pressures abate.

Subscriber figures were decidedly mixed, with mobile much improved, retail broadband much the same in a difficult market, and Openreach broadband much worse (but still manageable in context).

The bigger picture is that BT is successfully keeping all metrics roughly stable as it completes its fibre roll-out and waits for the inevitable cashflow turnaround as a result.

Vodafone/H3G/VMO2 have announced a spectrum-trading and towers-sharing deal, allaying potential spectrum concerns around the proposed Vodafone/H3G merger, although BT may argue that it is short of some critical spectrum bands.

The towers sharing agreement incorporates H3G spectrum into the VMO2/Vodafone Beacon agreement and appears to expand the agreement onto some of H3G's current sites.

We estimate a c.70% increase in VMO2 capacity from this deal and 5% for the industry as a whole (in addition to the 25% from the Vodafone/Three merger). BT/EE made a strong argument for spectrum reallocation in its merger objection, and some validity to that argument may or may not remain post-trade