New Era Beckons as Vodafone CEO Steps Down After Solid Full-Year Results

Vodafone's chief executive, Arun Sarin, is set to step down after guiding the company to a solid full-year result for the year ended 31 March. In a release today, Vodafone said Sarin will be stepping down in July after five years at the helm of the world's largest mobile operator by revenue. "Arun has done a tremendous job as chief executive," Chairman John Bond said in a statement. "He has led the company with distinction and navigated Vodafone through a period of rapid change. He has developed a new strategy for the business and significantly expanded our footprint in emerging markets." Vodafone swiftly confirmed Vittorio Colao, currently deputy chief executive and head of the European business, as the new chief executive.

The exit of Sarin has somewhat overshadowed Vodafone's solid performance for the year. Vodafone grew revenues by 14.1% to £35.48 billion (US$70.1 billion) as the acquisitions in India and Turkey helped to prop up slower growth in Europe. Organically, the group's revenue grew by 4.2%, reflecting the relative slowdown in the global telecoms industry. Profits were similarly higher, with earnings (EBITDA) rising 10.2% to £13.2 billion. Vodafone continued to build its customer base, growing its proportionate mobile customer base to 260 million at end March 2008. Expectedly, forays into emerging markets come at a price, with Vodafone's net debt jumping to £25.15 billion from £15.05 billion a year ago.

Outlook and Implications

• Europe Prospects Rise: Despite concerns about mature markets and the impact of regulations, Vodafone is still extracting growth from its European business. The group grew its revenues in the region by 2.0% as a surge in mobile data usage plus a foray into fixed services helped to offset decline in mobile voice revenues. The group struggled with reduced termination rates across much of its European footprint, and the effect of the Bersani Decree in Italy. In addition, just like most European telcos, the European Union (EU) mandated cuts in mobile roaming charges also hit revenues. However, Vodafone fought back, ditching its mobile-only strategy, and its hastily conceived, asset-light fixed telecoms strategy. The group now has fixed operations in most of its core European markets and has just announced plans to start offering DSL services in Italy. Vodafone has acquired Tele2's operations in Italy and Spain, Perlico in Ireland, and has taken full control of Arcor in Germany. In Portugal and the United Kingdom, the group offers fixed services by renting capacity from other providers. However, that option could well be changed soon as Vodafone looks set to acquire Tiscali's operations in both Italy and the United Kingdom.

• Emerging Market Bonanza: Vodafone's result continues the now-certain reliance of Europe's leading telcos on their emerging-market footprint. Vodafone grew revenues from its EMAPA (Europe, the Middle East, Africa, Asia Pacific, and Affiliates) division by 45.1% year-on-year (y/y), although the growth rate drops off to 14.5% when new acquisitions are discounted. Thanks to their huge populations, plus non-peak mobile penetration rates, India and Turkey still remain the key emerging markets driving growth. Vodafone almost doubled its mobile subscriber base in its EMAPA division to 119.1 million from 61.9 million a year ago. Apart from the Indian deal, the group is also part of the new mobile licensee in Qatar, and has been mentioned as interested parties for a swathe of telecoms targets in Vietnam, Bangladesh, and South Africa. Although the acquisitions that have already been made have fared well, Vodafone may need to up the ante to gain more assets for guaranteed future growth.

• The New Paradigm: Although the emerging-market footprint remains largely synonymous with high growth, Global Insight believes a new criterion may be beginning to take root. Emerging markets may still have high growth now, but inevitably their growth will plateau, mimicking the state of play in Europe. Similarly, although emerging market assets may have helped to offset low growth in Europe from mature markets and the credit crunch, the rise of data services is leading a resurgence in growth in Europe. Accordingly, a broad based portfolio gives companies the privilege of leveraging strong growth in one market to offset tougher conditions in another. Banking on growth in data revenues in Europe to offset slowing growth in the emerging market may seem preposterous today, but as cycles go, it could well become the reality of tomorrow.

• Sarin's Vindication: For a man who supposedly lost the support of over 10% of the shareholders in 2006, today's result is a vindication of his strategy for Vodafone. Sarin took over a Vodafone which needed to manage its portfolio, following the adventurous exploits of the Christopher Gent era. Then, the company resembled an octopus with tentacles everywhere and uncertainty in coordinating the different arms of its business. Sarin steadied the ship, sold off the struggling Swedish and Japanese units, and disposed the seemingly useless 25% stakes in Swisscom and Proximus. However, he refused to cave in to calls to sell out, or spin off, the stake in Verizon Wireless in the United States, and SFR in France. In turn, he pursued an ambitious emerging-market expansion strategy which saw him spending large amounts in Turkey and India—moves which brought instant recriminations. Faced with accusations of overpaying for assets, Sarin instituted a frugal fiscal policy guiding the company's M&A activity, a policy which may have scuppered the company's interest in the likes of MTN. Vittorio Colao will hardly change policy immediately, but will have to take some bold steps to stamp his mark on Vodafone. By bowing out now, Sarin has had the last laugh, leaving the stage while the ovation is loudest.

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