Vodafone to focus on cost control after revenue cut

By Kate Holton

LONDON (Reuters) - Mobile phone group Vodafone cut its full-year revenue outlook for the second time in four months on Tuesday but said it would maintain profits and boost free cash flow by cutting 1 billion pounds ($1.6 billion) of costs.

Investors and analysts welcomed the focus on cost controls and on improving performance, instead of on growth by expansion, pushing shares in the world's largest mobile phone group up 9.5 percent to 118.6 pence by 6:25 a.m. EST in a falling wider market.

Vodafone Group Plc (VOD.L), reporting its first set of figures under new Chief Executive Vittorio Colao, also reported first-half results that met expectations, but said conditions would be challenging.

"Vodafone has delivered a more material change to strategy than we expected, with more of a focus on cash and dividend than there has been in the past," Dresdner analysts said in a note.

"This is a fundamental change which, when combined with earnings momentum from stable operations, lower tax rates and favorable foreign exchange rates, supports a good chance of a rerating for the stock."

Vodafone now expects full-year group revenue to be between 38.8 billion pounds and 39.7 billion. It had already cut its expectations in July to the bottom of a previous forecast range of 39.9 to 40.7 billion pounds.

It slightly raised its free cash flow forecasts.

"Operating conditions are expected to continue to be challenging in Europe, given ongoing competitive and regulatory pressures and recent economic conditions in certain markets," the group said.

"Whilst the current economic environment is also impacting emerging markets, increasing market penetration is expected to continue to result in overall strong growth for the EMAPA (emerging markets) region."

The group raised its interim dividend 3.2 percent and said it would introduce a "progressive" dividend policy where growth reflects the underlying trading and cash performance.

First half revenue was slightly ahead of expectations, up 17.1 percent at 19.9 billion pounds, and core profit matched analysts' average forecast.

Most analysts welcomed the results, though others noted that European revenues fell 1.1 percent on an organic basis.

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Vodafone said it remained comfortable with its liquidity and committed to its single A credit rating.

"Given our credit rating and the current level of cash flow and dividends, this leaves limited debt capacity," it said.