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Analysis Of The Business And Financial Performance Of Vodafone


Submitted by: SIN104 Date Submitted: 07/24/2009 Category: Business Words: 6716 Pages: 27 Views: 1978 Popularity Rank: 1759

AN ANALYSIS OF THE BUSINESS AND FINANCIAL PERFORMANCE OF VODAFONE LIMITED OVER A THREE YEAR PERIOD SEPTEMBER 2008. [pic] TABLE OF CONTENTS 1. INTRODUCTION... ... 3 1. AIMS AND OBJECTIVES OF THE REPORT 3 2. LIQUIDITY... 4 3. SAFETY 4 4. PROFITABILITY.. 5 5. EFFICIENCY 6 2. INFORMATION GATHERING............................................................. ... 6 1. SOURCES USED AND REASONS. 6 2. METHODS USED TO COLLECT INFORMATION.. 7 3. ANALYSIS AND PRESENTATION. ... .9 1. SALES GROWTH ... .9 2. LIQUIDITY RATIOS.9 3. SAFETY RATIOS. 11 4. PROFITABILITY RATIOS.. 12 5. EFFICIENCY RATIOS. 13 1. STRATEGIC EVALUATION. 14 1. SWOT ANALYSIS VODAFONE 14 4. CONCLUSION ... 18 5. RECOMMENDATION... ... 20 6. BIBLIOGRAPHY ... 21

7. APPENDICES APPENDIX A FINANCIAL STATEMENT EXTRACTS. 22 APPENDIX B RATIOS OF VODAFONE.. 24 APPENDIX C- RATIOS OF ORANGE. 25 APPENDIX D- CUSTOMER SATISFACTION SURVEY... 26 1. INTRODUCTION This research and analysis report examines the financial position of Vodafone limited. The analysis is carried out from a shareholders point of view. I will carry out this research by looking at the key performance ratios and other important aspects of the business. The research will evaluate Vodafones performance in light of general economic environment and also make comparison with Orange Limited one of its closest rivals. I chose to research this topic because of my fascination with the telecommunication industry. This started with the introduction of the mobile telecommunication service in Nigeria in 2000 the growth of mobile telecommunications in Nigeria within the past eight years has been outstanding. Within the past eight years, there has been so much development and service improvement within the industry spanning from SMS, services, MMS to 3G technology. This has also brought about a great level of job and wealth creation within the general economy. Currently, the telecommunications industry in Nigeria is the third largest employer of labor. One can easily imagine how phenomenal this is considering the level of growth and improvement within the short time it was introduced. I chose to analyze Vodafone because of the numerous interesting articles I read about Vodafone in the press and especially the article on the fall of their share price which came down by 5.5p at 151.5p in March 2008. Excerpts from a report by Morgan Stanley revealed that the bank's analysts were concerned that the European Union will act to curb mobile termination rates, which they say could cut Vodafone's European earnings by around 11% over the next three to four years. The report read; "We regard mobile termination rates as a key driver of voice pricing and profitability for the large operators," said Morgan Stanley. "Vodafone remains heavily exposed (over 60% of equity value) to the European mobile market. MTR regulation is likely to level the playing field with challenger operators in the field of voice pricing. This could hit Vodafone particularly hard in the European sector." The bank also warns that the company's SMS revenues could be hit by the increasing popularity of instant messaging and email. As a customer of Vodafone, at the time of reading the article I was interested in buying Vodafones share. After reading the article, I changed my mind about buying the shares. Consequently, when I had the opportunity of choosing a company in the telecommunication industry to base my research project on, my first instinct was to go with Vodafone. 1.1 AIMS AND OBJECTIVES OF THE REPORT This research and analysis report will attempt to present a well thought out analysis of the past financial performance and future prospects of Vodafone limited from a shareholders point of view. Shareholders both present and prospective are interested in the level of risk, liquidity, profitability and asset utilization of the company where they own shares. Therefore my main focus would be on the important aspects of business and financial performance. Financial

ratios are a valuable and easy way to interpret the numbers found in statements. It can help to answer a lot of critical questions such as whether the business operating expenses are too high and whether the companys assets are being used properly to generate income. When computing financial relationships, a good indication of the company's financial strengths and weaknesses becomes clear. Examining these ratios over time provides some insight as to how effectively the business is being operated. The following are the most critical ratios for most businesses, though there are others that may be computed but these are the ones which I would concentrate my research project on: 1.1.1 LIQUIDITY Liquidity measures a company's capacity to pay its debts as they come due. There are three ratios which I have used to evaluate its liquidity. Current Ratio: The current ratio measures how capable a business is in paying current liabilities by using current assets only. Current ratio is also called the working capital ratio. Quick Ratio: Quick ratio focuses on immediate liquidity (i.e., cash, accounts receivable, etc.) but specifically ignores inventory. Also called the acid test ratio, it indicates the extent to which you could pay current liabilities without relying on the sale of inventory. Asset Cover Ratio: A test that determines a company's ability to cover debt obligations with its assets after all liabilities has been satisfied. When calculating the asset coverage ratio, investors should exercise caution with respect to asset value. 1.1.2 SAFETY Safety indicates a company's vulnerability to risk, e.g., the degree of protection provided for the business' debt. Two ratios would be used to evaluate the safety of Vodafone. Capital Gearing: The ratio is a multiplier or factor which when applied to fluctuations in operating profit, shows the greater changes that would occur in profits available for the shareholders. EBIT MARGIN: This assesses the company's ability to meet interest payments. It also evaluates the capacity to take on more debt. 1.1.3 PROFITABILITY Profitability ratios measure the company's ability to generate a return on its resources; an increase in the ratios is viewed as a positive trend. Gross Profit Margin: Gross profit margin indicates how well the company can generate a return at the gross profit level. It addresses three areas: inventory control, pricing and production efficiency. Net Profit Margin: Net profit margin shows how much net profit is derived from every pound of total sales. It indicates how well the business has managed its operating expenses. Return on Assets: This evaluates how effectively the company employs its assets to generate a return. It also measures efficiency. Return on Capital Employed (ROCE) Ratio: This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. 1.1.4 EFFICIENCY Efficiency evaluates how well the company manages its assets. Besides determining the value of the company's assets, it should also analyze how effectively the company employs its assets. Accounts Receivable Turnover: This ratio shows the number of times accounts receivable are paid and reestablished during the accounting period. The higher the turnover, the faster the

business is collecting its receivables. Accounts Payable Turnover: This ratio shows how many times in one accounting period the company turns over (repays) its accounts payable to creditors. A higher number indicates either that the business has decided to hold on to its money longer or that it is having greater difficulty paying creditors. Inventory Turnover: This ratio shows how many times in one accounting period the company turns over (sells) its inventory and is valuable for spotting obsolescence and the need for merchandising improvement. Sales to Total Assets: This indicates how efficiently the company generates sales on each pound of assets. Report would also include: Comparison of key ratios with one of its closest competitors Orange limited. My research would also critically assess the SWOT Analysis. 2. INFORMATION GATHERING 2.1.1 SOURCES USED AND REASONS: 1. Annual accounts of Vodafone Limited: They provide detailed annual results on which the key ratios are based, which are important in analysing the financial fitness of the company. Using the last 3 years financial accounts helped in evaluating the trend and progress of the company over a period of time (Trend Analysis). Vodafones accounts are being audited by Deloitte & Touche LLP, one of the big four auditing firms in the world, thus increasing the effectiveness and reliability of the accounts as a whole thereby reducing financial statement risk. However it is important to note that the financial statements may have some element of bias as the company aims to present itself in the best possible light. The annual accounts of Vodafone Limited would be used in the research and analysis of the research projects. 2. Annual accounts of Orange Limited: These accounts are also significant to this report. Their accounts where audited by Ernst & Young LLP another very reliable auditing firm and also one of the top four audit firms in the United Kingdom. The key ratios analyzed in this report made it possible to compare Oranges accounts against that of Vodafone. It mainly worked as a yardstick to measure Vodafones performance. I would be encountering some problems using the annual accounts of Orange as a yardstick to measure performance of Vodafone, as the accounts of Orange has its year end in December but that of Vodafone has its year end in March. I would be adjusting the period of account of Orange for 2005 and 2006 to start from April 2004 to March 2005 and April 2005 to March 2006, having year end for 2007 for Orange a period of account of 9 months instead of 12 months, I would also be apportioning Vodafones year end result of 2007 to 9 months when making comparison with Orange. 3. Financial Analysts report: They provide an insight about the health and future prospects of a company. These reports are prepared by skilled professionals who can critically analyse decisions made by the company and draw valuable conclusions. Most current and prospective shareholders make economic decisions based on analysts report. Financial analyst reports

from Morgan Stanley, J P Morgan and a lot of other financial analyst reports would be used in the research project. 4. Interim reports: Despite the fact these reports are not audited, they are very helpful in analysing trends and seasonality in the business. They could also be compared with last years reports to demonstrate the companys performance. These reports would be used in the conclusions. 5. Quarterly presentations reports: These are a great source of information as they are easy to understand because of their brief nature and point form structure. These would be used in the research analysis of the research project and also in the conclusion. 6. Newspaper Articles and Journals: Commentaries can have a significant impact on the share price of a company. Newspaper editorials and journals provide up to date information about a company along with expert analysis and outlook of the company. Such editorials and journals have contributed vital information to my project. 7. Financial advisors reports on Vodafone: The financial advisors of Vodafone are more likely to have detailed information about the company. Being at such a position they would be fully aware of the strengths, weaknesses, opportunities and threats facing the company. Hence, this makes their reports indispensable but such reports have been used contentiously for the purposes of my project as these could be favourably biased towards the company. I would be making use of Goldman Sachs reports amongst other financial advisors reports for the research and analysis of my research project. 8. Student Accountant Magazine, LCA study text for ACCA Paper P3 by Michael Mainwaring, Kaplan ACCA study text for Papers P5, P3 and P2 were all part of my general background reading and they complimented my already existed knowledge about analysing reports. 9. LCAs tutorial text for the research, Holmes (2002) Interpreting Company Reports and Accounts 8th Edition Harlow, FT Prentice Hall, Doing your research project A guide, J Bell (2005), Company Accounts Analysis, interpretation and understanding 6th Edition, Maurice Pendlebury and Roger Groves. I would benefit immensely from the use of these books. 2.1.2 METHODS USED TO COLLECT INFORMATION LIBRARY RESEARCH: I went to the British Library in Euston, City Business Library, Croydon Library and Elstree and Borehamwood Library. These were the places where I spent most of my time gathering information for my research project. My library research was split into two activities: - General reading: This was done mainly reading around the topic and it involved going through different books, newspapers, magazines, journals to understand the company and its operating environment. - Specific reading: This involved going through different CD ROMs, to get specific information about Vodafone and Orange. Some of the CD ROMs used include: Financial Analysis Made Easy (FAME): This provides detailed financial data, ownership structure and other descriptive information of so many companies in the UK. It will provide

the annual accounts, management reports, and key ratios of Vodafone Limited and Orange Limited. Marketline and Business Information Centre (DATA MONITOR): This provides the company profiles, revenue analysis, Strengths, Weaknesses, Opportunities, and Threats analysis, business description, history, location and subsidiaries of so many companies in the UK. It will provide the business description, history and subsidiaries of Vodafone limited this was used in the introduction and would be used in the conclusion. Global Market Information Database (GMID): This provides international market intelligence on countries, consumers and industries. It also offers access to over 4,500 global, country, industry, company and lifestyle report, company profiles, and company market share and brand share rankings. Information from the GMID has been used in the introduction and would be used in the research and analysis of the research project. Business Insights: This provides international strategic market analysis overview reports on everything from consumer goods, energy and financial services to healthcare, technology, telecommunications, e-commerce and human resource. This would be used in the strategic evaluation of the research project. Investext plus: This provides abstracts and forecasts for over 11,000 companies and over 53 industries worldwide. Frost and Sullivan: This provides in depth global market research and strategy reports covering medical technology, information and commerce technology, environmental and building technology and so many others. This would be used in the conclusion of the research project. Mint: This provides detailed financial information on 2.6 million United Kingdom companies. Proquest: This provides company profiles and Strengths, Weaknesses, Opportunities and Threats analysis of various companies. This would be used in the strategic evaluation of both Vodafone Limited and Orange Limited. WEBSITES VISITED: Access to the internet made the writing of these research project a lot easier as I was able to obtain a lot of important information which includes press releases, financial reports, and information for students. Some of the websites visited include Vodafone.co.uk, Orange.co.uk, economist.com, ft.com, wsj.com, factiva.com, marketresearch.com, mbdltd.co.uk; belfasttelegraph.co.uk, company house etc all provided abundant information. Although these sites provided important information but some of the information was unnecessary and this took a lot of time to extract relevant information. 3 ANALYSIS AND PRESENTATION 3.1.1 SALES GROWTH Vodafone sales in 2005 rose by 7% and also by 7.84% in 2006 but its sales in 2007 only rose by 0.99% for the full year end of 2007 and 0.54% for period ending 9 months with an average growth of 5.27%. This was mainly due to stiff competition in the market from TMobile with all operators responding to T-Mobiles aggressive Flext tariffs launched in February 2006. To improve its market competiveness, Vodafone deployed its Winning in the Market strategy completely refreshing its tariff offerings by launching Free Weekends (July 2006), Contract Tariff Refresh (September 2006), a new prepay core tariff, small business & SME refreshes (October 2006) and Family (November 2006). Orange also achieved sales growth of 4.29% in 2005 but its sales fell by 1.35% in 2006

and 5.88% in the nine months period in 2007 compared to Vodafone who still had a sales growth of 7.84% in 2006 0.74% in nine months in 2007.Orange also had an average decline in growth of 0.98%. [pic] 2. LIQUIDITY RATIOS 1. Current Ratio The current ratio for Vodafone increased from 0.65 to 0.70 in 2006 and 0.88 in 2007 with an average ratio of 0.74 this increase was due mainly to an increase in the trade debtors and stock of the company. In 2007 there was an increase in current assets by almost 50% leading to the increase in current ratio. Orange had a better current ratio in 2005 of 1.26 than Vodafone but its current ratio has consistently fallen in 2006 to 0.98 and 0.82 in 2007 with an average ratio of 1.02 compared to Vodafone whose current ratio has been rising. [pic] 2. Quick Ratio Vodafones acid test ratio rose from 0.64 in 2005 to 0.67 in 2006 and further rose to 0.85 in 2007 with an average ratio of 0.72, while Orange Limited has an acid test ratio of 1.20 in 2005, 0.94 in 2006 and 0.79 for 9 months period with an average ratio of 0.97. The ratios show that the stocks do not have a significant influence in the industry as there is only a slight difference between the current ratio and acid test ratio. The poor quick ratio can be said to be due to increased administration costs. In general, the quick ratio should not fall below one because this means that, if all creditors requested early repayment, there would be insufficient liquid or nearly liquid resources available to meet the request. 3. Asset cover The asset cover of Vodafone fell in 2006 from 1.75 to 1.66 but rose again in 2007 to 1.78 with an average ratio of 1.73; this indicates that Vodafone may not have difficulty in meeting its debt obligations after settling all liabilities. The bad result in 2006 can be seen clearly from this extract in the Times in March 2007 Vodafone is contending with fierce pressures from falling prices, regulation and the threat of new technologies. Last year a perceived inability to handle this and a flagging share price triggered one of the most turbulent periods in the groups history. This culminated in investors holding 15 per cent of Vodafone shares refusing to back the reelection of Mr Sarin. Yesterday he said that network sharing deals presented the single largest cost [saving] opportunity we have in our business. Analysts believe Vodafone could save hundreds of millions of pounds if it used the concept in all its territories. A healthy asset cover would also have a positive impact on its share price due to investors having more confidence in the company. Vodafones rival Orange also had a very good asset cover as it increased from 1.66 in 2005 to 2.67 in 2006 and had an asset cover of 2.02 in for period of 9 months year end 2006 with an average ratio of 2.12 which was better than that of Vodafone. 3.1.3 SAFETY RATIOS

1. Capital Gearing The capital gearing ratio of Vodafone in 2007 is 26.52, this means that the proportionate change in profit before tax is 26.52 times that of a change in profit before interest paid. Therefore, if profit before interest paid rises by 5% and interest paid remains constant then the profit before tax in 2008 will be expected to rise by 132.6% which is 26.52 times the proportionate increase of 5% in profit before interest paid. This relationship is only approximate because the level of gearing and interest paid on borrowing usually does not remain constant as is seen from Vodafones accounts but the capital gearing ratio gives a rough guide to the extra change in profits attributable to the shareholders due to the level of gearing. In 2005 the ratio for Vodafone was 2.18, 4.66 in 2006 and 19.89 for the apportioned period of 9 months and Orange in 2005 was 1.5, 2006 1.07 and 0.89 for the 9 months period. 2. Earnings before Interest and Tax Margin (EBIT) The EBIT ratio for Vodafone in 2005 was 15.02% but this fell in 2006 to 11.25% and fell further in 2007 to 10.12%, this signifies that if the company continues to have this decline in EBIT it would in the future begin to have problems making interest payments and would also find it difficult taking more debt as the lenders would not want to lend them more money. Orange has a better EBIT ratio of 24.89% in 2005, 43.69% in 2006 and 4.69% in 9 months period for year end 2007 than Vodafone this is because Orange is spending less on administration expenses; Vodafone for the future is also putting in place policies so as to reduce its administration expenses by at least 10%. [pic] 3.1.4 PROFITABILITY RATIOS 1. Gross Profit Margin The gross profit margin of Vodafone over the three years has fallen slightly from 37.28% in 2005 to 35.23% in 2006 to a further 30.73% with an average gross margin of 34.41% and this fall has been as a result of continuous rise in the cost of sales. Though its gross profit margin has been falling, compared to Orange whose gross profit margin was 28.67% in 2005, 24.09% in 2006 and 16.5% and an average of 23.09% their ratios are a lot better this only shows that the industry is at its matured stage and Vodafone has put in place new marketing strategies to cut its cost. 2. Net Profit Margin The net profit margin of Vodafone over the three years has fallen from 6.91% in 2005 to 2.41% in 2006 and to 0.38% in 2007 with an average margin of 3.23%, this is due to increase in various costs such as interconnect costs and operating expenditures. The net profit margin of Orange was 23.06% in 2005, 43.06% in 2006 and 5.34% in the 9 months period year end 2007 with an average margin of 23.84% this net profit margin was a lot better than that of Vodafone. [pic] 3. Return on Assets

The return on assets ratio for Vodafone fell from 6.91% in 2005 to 2.41% in 2006 and 0.38% in 2007, this fall was due to the impairment losses as extracted from Times November 2006 The impairment charges related to the carrying value of goodwill in its German and Italian operations in the light of higher interest rates, pricing and regulatory pressure. This lead to a pre-tax loss in the first half compared with a 3.9 billion interim profit in 2005. Their profits are still expected to fall in 2008 due to the credit crunch which is affecting the world economy. Orange has a better return on asset ratio than Vodafone but they might not be able to sustain continuous increase in profits in the future as their return on assets ratio fell drastically in 2007 and they have not had any form of consistency in their ratio as it increased rapidly from 13.56% in 2005 to 26.53% in 2006 and fell sharply in the last 9 months in the year end 2007 to 3.07% it had an average margin of 14.39%. The net profit before tax has been used here so as to avoid distortions caused by differences in the taxation liability of different companies. 4. Return on Capital Employed (ROCE) The ROCE of Vodafone fell from 8.43% in 2005 to 7.49% in 2006 and further fell to 6.77% in 2007 with an average of 7.56% over the three year period. The fall in 2007 is largely due to the increased operational and administrational cost within this period Vodafone is expected to reap the benefits of these strategies in the near future. Orange had better ROCE as it had a ROCE of 17.43% in 2005, 34.23% in 2006, 4.71% in the 9 month period year end 2007and an average of 18.79%, but it could be seen that although there was an increase in their cost of sales but their administration cost has been reduced by more than 45% and their turnover has also fallen. 3.1.5 EFFICIENCY RATIOS 1. Accounts Receivable Turnover There has been an increase in the receivable turnover ratio of Vodafone from 14.06 in 2005 to 14.48 in 2006 but there has been a sharp decline in 2007 as the ratio fell to 12.60 in 2007 which is less than their average of 13.71, this is not good for the company as this means it is taking them more time to collect their debts from their debtors. Orange had a better accounts receivable turnover of 176.55 in 2005, 93.57 in 2006 but this fell sharply in the last 9 months with it having a receivable turnover ratio of 28.35 it also had an average receivable turnover of 99.49 which was quite good. 2. Accounts Payable Turnover There has been an increase from 16.57 in 2005 to 22.38 in 2006 but fell again to 16.03 in 2007 with an average payable turnover of 18.33, generally this ratio can be used as an approximate indication of the credit payment policy of Vodafone, it can be said that Vodafone has a relatively better and stable accounts payable turnover than Orange with it having a payable turnover of 15.95 in 2005, 10.81 in 2006 and 10.8 in the 9 months period for year end 2007. 3. Inventory Turnover An important aspect of a company concerns the level of stock that should be held. Very often a considerable amount of capital is tied up in the financing of stocks, it is therefore important that the level of stock held by the company is right. Vodafone has its inventory turnover

falling from 91.40 in 2005 to 38.64 in 2006 and it rose in 2007 to 41.89 this shows that in 2006 the stocks where held for a longer period before sale. The company took note of this default and started working towards getting the inventory turnover right which lead to the rise in 2007. Orange on the other hand has had a fairly stable inventory turnover although it is quite low with it being 43.63 in 2005, 43.78 in 2006 and 9 months period being 46.70. 4. Assets Turnover Ratio This ratio is used to measure the performance of the company in generating sales from the assets at its disposal. Vodafone can be said to have turned over its asset 0.41 times to achieve its sales of 4,546.9 in 2005, 0.47 times to achieve a sale of 4,903.6 in 2006 and 0.44 times to achieve a sale of 4,952.4 in 2007. Orange has a better assets turnover ratio of 0.59 in 2005, 0.62 in 2006 and 0.57 in 9 months period for 2007. This ratio might be a misleading ratio to use to judge the companies as Orange has better ratios because it has made lower investment in resources compared to Vodafone. 3.2 STRATEGIC EVALUATION 3.2.1 SWOT ANALYSIS VODAFONE The SWOT analysis will be used to analyse the business performance of Vodafone Limited. | | | |STRENGTHS |WEAKNESSES | | | | |Leadership Position |Limited Exposure in Emerging Markets | | | | |Global Brand Strength |High Debt and Poor Returns | | | | |Strong Network Infrastructure and Comprehensive Product Portfolio|High Customer Churn Rates | | | | | |Failure in the Japanese Market | | | | |OPPORTUINITIES |THREATS | | | | |Expanding Market Boundaries |Increased Competition | | | | |Growth Through 3G |Market Saturation | | | | |Cost Reduction Initiatives |EU Regulation on International Roaming | | | |

| Legal Risks STRENGTHS

|Increased Exposure to Economic, Political and |

Leadership Position At the end of March 2005, based on the registered customers of mobile telecommunications ventures in which it had ownership interests at that date, Vodafone had 431.8 m registered venture customers Business Insights. This enables it to maintain a strong presence in each of its locations, offsetting any losses in one area by profits in another. Global Brand Strength Vodafones recognition as a global brand builds upon the strength of its operating companies brands and also enables Vodafone to embark on high-profile marketing campaigns. This gives Vodafone the ability to offer global services which companies operating in individual markets would find difficult to do on their own. Its diversified geographic portfolio arguably mitigates risk from a single country and Vodafones global brand does enable market entry more easily Business Insights. Strong Network Infrastructure and Comprehensive Product Portfolio According to Market Line Data Monitor, by the end of March 2005, there were 2.1 m devices on controlled networks capable of accessing the Vodafone live with 3G portal. 3G has enhanced the mobile experience with up to a ten-fold increase in portal and content download speeds over GPRS, giving Vodafone live customers access to a unique range of high quality content and communication services. The group has strong network infrastructure that supports its operations. Mobile networks cater to the voice and data service requirements of the customers. WEAKNESSES Limited Exposure in Emerging Markets Vodafone has limited exposure in many emerging markets in Asia, Latin America, the Middle East, and Africa. For instance, China and India represent two major markets for cellular telecommunications that are likely to grow rapidly in future years. China is one of the worlds largest mobile phone markets and although, Vodafone has acquired a presence in it through China Mobile Limited (Vodafone currently owns 3.3% of China Mobile Limited), this presence is small Market Line. India also appears very appealing with a population in excess of one billion, where the company has no presence. High Debt Current and future indebtedness of Vodafone could have important consequences for the stakeholders in the company. For example, debt could impair Vodafones ability to make investments and obtain additional financing for working capital or capital expenditures. High Customer Churn Rates

According to Business Insight, the rate of customer churn (calculated as total gross customer disconnections divided by average total customers in the period) continues to present Vodafone with problems. For example in the UK, Vodafone had a customer churn rate of around 29.7% at the end of March 2005. It also stated that the company has high churn rates in many of its primary markets like Spain, Germany and Italy. High customer churn rates will result in higher costs and reduced revenues. Higher costs will be caused by the company having to spend more money on acquiring new customers to replace those lost to competitors. Failure in the Japanese Market Vodafones Japanese subsidiary Vodafone Japan, performed weakly in the Japanese market and had been losing out to competitors such as NTT DoCoMo and KDDI Data Monitor. Vodafone Japan had been slow to build an advanced 3G network and launched 3G services in 2004 without having enough supporting infrastructure. As a result, there were severe service problems and the customers began to move away from the company to its competitors. Vodafone sold the company in 2006 due to its weak performance. OPPORTUINITIES Expanding Market Boundaries The companys management has flagged emerging Eastern Europe as its main priority in terms of expansion in the past. Following the acquisition of TIW earlier in 2005, Vodafone now has 100% ownership of operations in Hungary, Romania and the Czech Republic Business Insights. This footprint could theoretically be expanded into Russia, Poland and Turkey, where Vodafone does not yet have a controlled operation. These businesses are fast growing and the company believes it will benefit fully from the global services and scale benefits that the group can deliver. Growth through 3G 3G will likely be positioned as the principal new growth driver in Vodafones existing 27 markets. Vodafone has begun to push 3G more aggressively in many markets. Vodafone has stated that it was seeing higher returns on its 3G handset base than its 2G handset base. With a relatively established 3G network, Vodafone is slightly ahead of some of its incumbent competitors and a year or two ahead of some of the third and fourth operators (e.g. Bouygues, T Mobile UK). Cost Reduction Initiatives Vodafone has implemented cost reduction initiatives in the last fiscal year. Some of those initiatives were like outsourcing the application development, maintenance for key IT systems and network sharing deals, among others. In October 2006, the group formed agreements with EDS and IBM to provide application development and maintenance services to various operating companies, under the group Data Monitor. The group had also targeted network sharing deals in various operating companies. Network sharing deals enable faster and cost effective rollout of networks. THREATS

Increased Competition The focus of intensifying competition in many of the companys markets continues to shift from customer acquisition to customer retention as the market becomes increasingly penetrated. Increased competition has also led to declines in the prices the group charges for its mobile services and is expected to lead to further price declines in the future. Competition could also lead to an increase in the level at which the group must provide subsidies for handsets. Market Saturation in Europe Market saturation could prove a problem in Europe in future years. European markets have become saturated as the high penetrations have meant that many Europeans now own a mobile phone and there is now little room for growth. This could present Vodafone with a major problem as to how to increase its revenues in the future if take-up of new 3G data services is low. EU Regulation on International Roaming In February 2006, the European Commission proposed new legislation by way of roaming regulation to reduce excessive prices charged by mobile network operators for international roaming services. These proposals were adopted by the European Parliament on 23 May 2007. The regulation required mobile operators to offer (within one month of the regulation coming into force) a Euro-tariff under which the cost of making calls within the EU is capped at 49 eurocents and the cost of receiving calls within the EU is capped at 24 eurocents. Customers, who have not already opted for another roaming tariff, would be automatically opted to the Euro-tariff within three months of the regulation coming into force Market Line abstract. In effect to the above regulation, the group had reduced its European roaming prices by over 40%. Continued decline in the roaming caps would affect the revenues of Vodafone. 4. CONCLUSION Vodafone has had a strong growth since its incorporation. Vodafone commands a large percentage of the United Kingdom market and is the market leader in the telecommunication industry. Its overseas operations have also had a strong growth and they are one of the biggest telecommunication companies in the industry. Although Vodafone has had its net profit falling by 93% from 2005 to 2007 this is mainly due to increased cost of operations. As sales rose by only 8% from 2005 to 2007 compared to cost of sales which rose by 17% from 2005 to 2007 and also administration expenses also rose by almost 9% so with both cost rising by a total of 26% compared to income only rising by 8% this led to the fall in net profits. This is a short term situation as the group has put in place measures to cut their cost by over 30% within the next 5 years and increase their income. Vodafones return on capital employed has been falling over the three year period as seen in appendix Section B, 4(iv) this shows that Vodafone has not been efficiently utilizing its resources, its earnings before interest and tax has also been falling as seen in appendix Section B, 3(ii) this is also not looking good for the company. The liquidity of Vodafone is also very low and has not improved this might make it difficult for them to meet their

financial obligations. One area where the company has done so well is in efficiency they have a very good and constant working capital cycle as seen in appendix Section B5. With the credit crunch things are not likely to improve just yet, Vodafone has recently announced that it would be affected by the credit crunch. Vodafone shocked everyone by becoming the first telecoms company to warn that revenues would suffer from the deteriorating economic conditions. The worlds largest mobile phone group hinted at a recessionary impact in the UK and a slowdown on the Continent dragging on its full-year returns in a sector considered immune to the credit crunch. The chief executive officer of Vodafone Mr Arun Sarin was quoted as saying we are beginning to see an impact from the current economic environment which is greater than we expected as the group announced that its revenue for 2009 would be at the bottom of its previous predictions. Independent the London (July 23 2008). Vodafones customer knowledge driven organization aims to make the most of its deep customer understanding by approaching customers with the most appropriate product through a channel they enjoy at a time that is best for them. This approach firmly places Vodafone as an organization that listens to customers, delivers value and enhances their experience. Vodafone continues to use a customer measurement system called customer delight (Source: Quarterly Review Report) to monitor and drive customer satisfaction in the Groups controlled markets at a local and global level. This is an analytical system, which tracks customer satisfaction across all points of interaction with Vodafone and identifies the drivers of customer delight and their relative impact. This information is used to identify any areas for improvement and focus. Vodafones global sponsorship strategy has delivered a strong set of results across all Vodafone markets. Central sponsorship agreements, including the UEFA Champions League and the title sponsorship of the Vodafone McLaren Mercedes F1 team, have supported multiple business objectives and enabled Vodafone to provide customers with differentiating brand and product experiences. The strong performance of the Vodafone McLaren Mercedes F1 team during the 2007 season enabled Vodafone to maintain a dominant presence in one of the worlds most popular annual sporting events. (Source: TNS Soccerscope, May 2007) and used to showcase a variety of products and services in a manner designed to build greater affinity with football fans across all relevant territories. Vodafone achieved other corporate social responsibility, in the energy sector it aimed to reduce its CO2 emissions by 40% by 2011 but it decreased it by 50% three years earlier, it also aimed to collect a million handsets for reuse and recycling by March 2008 but it collected 1.3 million handsets exceeding its target it also aimed to reuse and recycle 95% of network equipment waste by March 2008 it exceeded this as it sent 98% for reuse and recycle. All said, there is the non financial effect of the credit crunch on Vodafone with so many loss of jobs and pay cut, there is insufficient disposable funds for people with the high cost of food, increased cost of fuel and rising utility bill for them to want to spend on increasing their tariffs or incurring more cost from mobile providers. 5. RECOMMENDATION From an analytical point of view my personal opinion is that Vodafone is not a good company for one who is looking at short term investments to invest in as the company would not be making good returns in the near future. This said, if one wishes to make a long term investment Vodafone would be a very good company to invest in as in the next five years Vodafone is sure to almost triple its gross income which if invested in now would yield very good dividend in future. Investing in Vodafone can be said to be a low risk investment as the telecommunication

industry compared to other industries seem to be slightly hit by the credit crunch, so although revenues would fall it is not likely to fall too bad and with Vodafone branching into the Asian and African markets it would have a fall back for the losses it would be expecting in Europe. 6. BIBLIOGRAPHY LCA (2007) ACCA Textbook: Paper F9 Financial Management. Berkshire, Kaplan Publishing LCA (2007) ACCA Textbook: Paper P2 Advanced Corporate Reporting. Berkshire, Kaplan Publishing LCA (2007) ACCA Textbook: Paper P5 Advanced Performance Management. Berkshire, Kaplan Publishing Foster, G. (1986) Financial Statement Analysis, 2nd Edition. Harlow, Prentice Hall Terry, H. (2000) Operations Management: Strategic Context and Managerial Analysis. New York, Palgrave Macmillan Holmes, G. (1999) Interpreting Company Reports and Accounts, 7th Edition. Harlow, FT Prentice Hall Maurice, P. and Roger, G. (2004) Company Accounts: Analysis, Presentation and Understanding, 6th Edition. London, Thomson Learning Telecoms Watch Cellular News, (2007) Customer Satisfaction Survey, August 22 Times Online, (2007) Investors Take Fright at Vodafones Shrinking UK Margins, March 31 Times Online, (2006) Vodafone Reports First-half Loss, November 14 Belfast Telegraph, (2008) Vodafone shares plunge on recession fears, 23 July 2008 Vodafone (2005) Annual Reports of Vodafone, March 31 Vodafone (2006) Annual Reports of Vodafone, March 31 Vodafone (2007) Annual Reports of Vodafone, March 31 Orange (2004) Annual Reports of Orange, December 31 Orange (2005) Annual Reports of Orange, December 31 Orange (2006) Annual reports of Orange, December 31 Vodafone (2008) Interim Reports of Vodafone, March 31 FINANCIAL STATEMENT EXTRACTS VODAFONE |PROFIT & LOSS ACCOUNT |3/31/2007 |3/31/2006 |3/31/2005 |VODAFONE | | | | | | | | | | |12 months |12 months |12 months | | |th GBP |th GBP |th GBP | | |Uncons. |Uncons. |Uncons. | | |UK GAAP |UK GAAP |UK GAAP | |Turnover |4,952,400 |4,903,600 |4,546,900 | |UK Turnover |4,802,100 |4,768,900 |4,431,800 | |Overseas Turnover |150,300 |134,700 |115,100 | |Cost of Sales |-3,430,700 |-3,176,300 |-2,851,600 | |Exceptional Items pre GP | | | | |Other Income pre GP | | | | |Gross Profit |1,521,700 |1,727,300 |1,695,300 | |Administration Expenses |-1,181,800 |-1,317,000 |-1,076,800 | |Other Operating Income pre OP | | | | |Exceptional Items pre OP | | | |

|Operating Profit |339,900 |410,300 |618,500 | |Other Income |161,300 |141,600 |65,600 | |Total Other Income & Int. Received |161,300 |141,600 |65,600 |Exceptional Items | | |1,100 | |Profit (Loss) on Sale of Operations | | | | |Costs of Reorganisation | | | | |Profit (Loss) on Disposal | | | | |Other Exceptional Items | | | | |Profit (Loss) before Interest |501,200 |551,900 |685,200 | |Interest Received | | | | |Interest Paid |-482,300 |-433,600 |-370,900 | |Paid to Bank | | | | |Paid on Hire Purchase | | | | |Paid on Leasing | | | | |Other Interest Paid | | | | |Net Interest |-482,300 |-433,600 |-370,900 | |Profit (Loss) before Tax |18,900 |118,300 |314,300 | |Taxation |-32,300 |-56,700 |-157,800 | |Profit (Loss) after Tax |-13,400 |61,600 |156,500 | |Extraordinary Items | | | | |Minority Interests | | | | |Profit (Loss) for Period |-13,400 |61,600 |156,500 | |Dividends | | | | |Retained Profit(Loss) |-13,400 |61,600 |156,500 |

ORANGE |PROFIT & LOSS ACCOUNT |12/31/2006 |12/31/2005 |12/31/2004 |ORANGE | | | | | |12 months |12 months |12 months | | |th GBP |th GBP |th GBP | | |Uncons. |Uncons. |Uncons. | | |UK GAAP |UK GAAP |UK GAAP | |Turnover |4,139,000 |4,484,000 |4,449,000 | |UK Turnover |4,087,000 |4,462,000 |4,304,000 | |Overseas Turnover |52,000 |22,000 |145,000 | |Cost of Sales |-3,456,000 |-3,299,000 |-3,140,000 | |Exceptional Items pre GP | | | | |Other Income pre GP | | | | |Gross Profit |683,000 |1,185,000 |1,309,000 | |Administration Expenses |-460,000 |-785,000 |-671,000 | |Other Operating Income pre OP | | | | |Exceptional Items pre OP | | | | |Operating Profit |223,000 |400,000 |638,000 | |Other Income |41,000 |2,117,000 |6,000 | |Total Other Income & Int. Received |41,000 |2,117,000 |6,000 | |Exceptional Items | | | | |Profit (Loss) on Sale of Operations | | | | |Costs of Reorganisation | | | | |Profit (Loss) on Disposal | | | | |Other Exceptional Items | | | |

|Profit (Loss) before Interest |Interest Received |Interest Paid |Paid to Bank |Paid on Hire Purchase |Paid on Leasing |Other Interest Paid |Net Interest |Profit (Loss) before Tax |Taxation |Profit (Loss) after Tax |Extraordinary Items |Minority Interests |Profit (Loss) for Period |Dividends |Retained Profit(Loss) [pic]

|264,000 |2,517,000 |644,000 | | | | |-43,000 |-66,000 |-86,000 | | | | | | | | | | | | | | | | | |-43,000 |-66,000 |-86,000 | |221,000 |2,451,000 |558,000 |-50,000 |-76,000 |-171,000 | |171,000 |2,375,000 |387,000 | | | | | | | | |171,000 |2,375,000 |387,000 |-400,000 | | | |-229,000 |2,375,000 |387,000

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[pic] Orange Ltd's account end at 31 December so I have apportioned it to have its year ending in march so as to able compare it with Vodafone Ltd effectively. For the year 2007, Orange Ltd is for nine months. [pic] Not the paper you're looking for? Order A Custom Essay

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