Vodafone's return to growth hints at wider sector recovery

By Kate Holton

LONDON (Reuters) - Britain's Vodafone (VOD.L) posted a rise in quarterly sales for the first time in nearly three years on Tuesday in the clearest sign yet that Europe's mobile market is edging towards recovery.

The world's second largest mobile operator has been hit hard by the constraints on consumer spending in its big European markets, fierce competition in India and by regulator-imposed price cuts around the world.

But on Tuesday it finally forecast 2016 core earnings growth on an organic basis following seven straight years of declines.

That follows updates from the likes of Telefonica (TEF.MC) and Deutsche Telekom (DTEGn.DE) which also showed signs of gradual, if slow, improvement in Europe.

Vodafone, which has 446 million mobile customers in countries ranging from Albania to Ireland, Qatar, India, South Africa and New Zealand, posted fourth quarter organic service revenue, which strips out one off costs such as handsets, up 0.1 percent following 10 quarters of declines.

That was helped by 6 percent growth from the Africa, Middle East and Asia Pacific division and an improvement in Europe where it fell by 2.4 percent, compared with the 2.7 percent fall in the previous quarter.

"We have seen increasing signs of stabilisation in many of our European markets, supported by improvements in our commercial execution and very strong demand for data," Chief Executive Vittorio Colao said.

Shares in the group slipped 2 percent in early trading, pulling back from a 9 percent rise in just over two months as investors anticipated the better results.

"For some time now, Vodafone has been trying to shake off the shackles of being regarded as a company which is "ex growth" and today's annual reflection points toward some future promise," said Hargreaves Lansdown Stockbrokers.

BRIGHTER FUTURE

Analysts believe the European mobile market is set to stabilise in 2015 and 2016 and should return to top-line growth after that, helped by demand for the more expensive fixed-line fibre services and superfast 4G mobile connections.

They believe Vodafone should be well placed to reap the rewards after it embarked on a programme called Project Spring which was designed to bolster its mobile speeds and either build or buy superfast fixed-line broadband networks.

"We have significant opportunities ahead of us, with only 13 percent of our European mobile customers using 4G, and our market share in fixed services only a fraction of our share in mobile," it said.

The one weak spot in the results was Germany, where it was hit by stiff competition. The group said the CEO of Vodafone Germany, Jens Schulte-Bockum, would stand down during the 2015-16 financial year.

One other longer-term concern for Vodafone investors has been the thought that it could seek to upgrade its networks in one go by buying Europe's biggest cable operator Liberty Global (LBTYA.O).

Analysts at Jefferies said they would like to hear the company predict strengthening revenue trends through the year.

"We view this as key to reassuring investors on Project Spring delivery and calming fears that Vodafone may need to reinforce itself with Liberty in due course," they said.

Vodafone forecast a range for 2015-16 core earnings of 11.5 billion pounds ($18.0 billion) to 12 billion pounds, which would indicate core organic earnings growth of between 1 to 5 percent.

The group said it also intended to grow its dividends per share annually after a 2 percent rise in 2014-15.

Analysts at Citi said the results and guidance were in line with forecasts. "We see the positives as probably not quite positive enough to keep the stock moving up today," they said.

($1 = 0.6387 pounds)

(Reporting by Kate Holton; Editing by Paul Sandle and Sophie Walker)