Telecommunication Industry and Vodafone Group - Case Study Example

Contents Introduction Telecommunication Industry 2 Vodafone Group PLC 3 Financial Performance 4 Vodafone Financial Strategies 6 Short Term and LongTerm Strategies 6 Forms of Financing 6 Business Strategy 7 Conclusion 8 References 8 Appendix 8 Introduction The last few years have seen a dramatic change in the dynamics of international business. The most affected industries are the ones which seemed most promising only a few years ago. A very good example is of the automobile industry. The growth in the automobile sector was off the charts for the better part of last decade. This was basically due to the large growth in the financial sector and the exaggerated competition and growth in the banking industry. The availability of the cheap credit made it very easy for people to finance car loans. Thus people ended up spending much more than they were earning. This led to an over flow of cars on the road. The increased demand also forced manufacturers to spend more on capital expansions. However as the world saw this demand was not real demand but in fact only an inflated market. The financial hit to these automobile manufacturers was therefore very severe. The developments in the financial sector also directly affected another industry. The real estate sector was without doubt the most affected in the recent economic crisis. The large amount of were mortgages taken out on properties which were worth much less than, led to a terrible crash in the housing market. When the market corrected itself and reached equilibrium it was a bit too late for the financial gurus who had missed the apparent signs of what was to follow. The telecommunication industry was another industry which was severely injured by the financial crunch. The affects on the telecommunication industry however were relatively different as compared to the other two sectors discussed above. This is because the affect on the telecom sector was not a direct affect but rather a trickle down affect. The industry suffered from a general slowdown in business and lack of available credit to sustain the capital costs the industry had incurred in the periods of growth. The reduced consumer spending due to lack of jobs and increased competition from competitors also results in major setbacks to the telecommunications industry. Therefore we can say that the telecommunication industry was a victim to its own fast growth. The increased competition amongst the industry led to reduced profit taking opportunities for players and thus lower profits. Telecommunication Industry The telecom industry for the year 2010 was steady even if there was no great growth. The industry was suffering from limited consumer base in the last couple of years. However new niches have appeared in the market which can be targeted by smaller players. Moreover the turmoil in the market which was very common in 2009 was slightly reduced. Many smaller companies were being closed down or were being bought off. This trend was greatly reduced in the last year. This does not only show that there is still demand for new telecom products but in fact the market is more diverse than ever before. Therefore opportunities are present from large networks with long reach and smaller networks with specialized products. Another reason to this revival is the reduced emphasis of the industry on replacing older technology with newer versions. This is also in part due to the sluggish market conditions. A very good example is of the NT6X21AC line card. To predict the future of the telecom industry is right no not possible. This is because more than economics factors this is actually mostly dependent on technological factors. The recent progress brought about in the telecom industry by gadgets such as iphone and android can be a life saver for the telecommunication industry. This is because the telecommunication industry is finally getting consumer’s money for using the internet services. If this trend continues, the smart phones would turn out to be the laptops of tomorrow. This would however depend mainly on technology rather than economics factors. A key technology in this regard would be the voice to text software. Once this technology is improved people would be able to directly use their phones to complete their office work. This would help cell phones completely replace computers in the long run. Thus it can be hoped that with the advent of time all communication sources will converge into one single source. Vodafone Group PLC The company is currently considered by many metrics to be the largest telecommunication company in the world. The company is a multinational with its network in many different countries across the globe. The headquarters of Vodafone are located in United Kingdom. The Vodafone headquarters in Newbury is considered to be the biggest network provider around the globe. The company leads it competitors both by revenues and subscribers (active users of service). The company is marginally in front of the China based telecommunication giant China Mobile. Vodafone has currently around three hundred and thirty two million users worldwide. These three hundred and thirty two million are spread in over thirty different countries where Vodafone directly operates in the market. Besides these thirty countries Vodafone also operates in around forty countries through partnerships and indirect ownership. The dominance of Vodafone is not only limited to the telecommunication companies. The telecommunication sector is currently a very attractive area for investment and is targeted by international investors the world over. This can be seen by the prominent place of Vodafone on the international financial sector. The company currently has a cap (market capitalization) of more than ninety five billion pounds. Thus it is also a part of the prestigious FTSE 100 index. In terms of market capitalization Vodafone is the 3rd largest company on the LSE. Due to its large percentage ownership in the Verizon Wireless it is also represented on NASDAQ. Vodafone owns more than 45% of Verizon Wireless. It must be noted that Verizon Wireless is the largest cellular service provider in the United States. Financial Performance Like other multinationals belong to the telecommunication sector or otherwise Vodafone was also directly affected by the contraction of the world economy. The reduction in consumer spending meant lesser and lesser profit margins and smaller turnovers. Despite these odds Vodafone was able to report a profit of 11.5 billion pounds for the year. Although this was less as compared to the previous year, the difference was only 2.5%. The biggest problem faced by international companies in the year of 2009/2010 has been the reduced cash flows. The performance of Vodafone was the most successful in regard to cash flow when compare to industry in general. The cash flow for the year was 7.2 billion pounds. This was a mammoth increase of 27% on the cash flows for the previous year. This stable financial performance has also prompted the company to announce a dividend in a market where most companies are looking towards capital retention strategies. Thus we can say that in the long run the company aims to increase attractiveness of its share rather than retain capital. The company has given a dividend of 8.31 pence for the year 2010. The company aims to maintain the dividend strategy for next three years. This also shows that the confidence of the managers is high in the market. The dividend payout ratio is a good indicator of the performance of any company. This is because it shows the level of confidence the company has in the regularity of its own cash flows. Many companies however make the mistake of reducing capital expenditure to pay a dividend. The situation has been entirely different with Vodafone PLC. Despite the increase in its dividend payout ratio the company has been able to maintain last year’s capital expenditure of 6.2 billion pounds. This stable financial position has show fruit in terms of capital gains for the share price of Vodafone in the London Stock market. Vodafone Financial Strategies Short Term and Long Term Strategies The company has realized the unique business environment which is prevalent in the telecommunication industry. In such a business environment a business does not only have to stabilize their cash flow but also continue to grow at a reasonable pace. This is because as companies fail they change their marketing strategies and try to compete on cost. Thus as a result larger companies such as Vodafone also have to bring down cost in order to retain its own customers and stop them from making the switch. Therefore the company has employed new business strategies adapting its old practices to accommodate the market for the changes which have materialize over the last few years. In any recession economy the first strategy is to reduce the company has also focused on cutting cost and reducing extra costs whether it is network expansion or marketing costs. The company is aiming to become more efficient by reducing the costs which can be reduce without reducing the quality of service. The company has invested almost a billion dollar in cost program and intends to invest a further billion dollar in the coming year. The program will play a great role in stabilizing revenues and profit margins as prices continue to decline in the international and especially the European markets. Due to these cost programs the revenues from voice and data have both increased by almost twenty percent for Vodafone in the past year alone despite the decrease in prices. Therefore the company has to increase capital expenditure in the networks in order to increase capacity which can support the lowered rates. This will ensure that Vodafone maintains revenues at a stable level in the coming years. Forms of Financing Therefore it can be said that the company is investing in increasing the capacity of its network. This capital expenditure would require more loans and finance cost in the future. This also shows a contradiction with the dividend strategy being adopted by the company. The increase in divided could also point towards a share offering in the very near future. The company might be increase the share price in order to make a share offer to raise capital rather than borrowing money. This is because the cost of debt is higher than ever in the international market. The tax benefit of debt might not be enough to prompt debt financing by Vodafone and the company might rely heavily on equity funding. There are many drawbacks and risks associated with equity funding. The biggest risk is the weakening of the management and reduced power of existing shareholders. Moreover in the long run it is an established fact that equity funding is always more expensive as compared to debt financing. Business Strategy The company has introduced many new services over the last few months and would likely continue to do so. A very recent example is the new Vodafone 360 service which is aimed at making the internet more usable on smart phones and cell phones. The M-Pesa service is a key breakthrough service being introduced in countries like Kenya where the banking systems are not that developed. The company has achieved transfers of over three billion dollars from its M-Pesa service. This is because the targeted companies have security problems which prompt people not to carry money and rather use the Vodafone service to pay for services. The company continues to target niche markets such as the African markets where the competition is lower but the prices and thus profit margins are even lower. The future therefore would be mostly dominated by unique products and unconventional markets. Conclusion Vodafone would continue to increase the dividend payout ratio. This could be a direct affect of the increase in international debt costs. The increased strain on company’s networks due to reduced costs would demand more investments. Therefore the company could be targeting to raise these funds through share offerings rather than debts. So far the increase Vodafone share prices point to the fact that this strategy has worked for the company. References Annual Reports. (2010). Vodafone Group PLC Annual Reports. (2009). Vodafone Group PLC Watson D & Head A. (2010) Corporate Finance: Principles and Practice. 5th edn. Prentice Hall. Arnold, G. (2005) Corporate Financial Management. 3rd ed. Prentice Hall. Pike, R. and Neale, W. (2009) Corporate Finance and Investment, 6th ed. Prentice Hall Smith, M (2005) Performance Measurement & Management. Sage. Weetman, P. (2006) Financial & Management Accounting. 3rd ed. Prentice Hall. Froot, K. David, S. Stein, J (1994). A Framework for Risk Management. HBR. Reprint 94604 Brigham, E. (2006). Intermediate Financial Management. McGraw-Hill  Philip, R. and Violet, T. (2000). Efficient market hypothesis: A survey. Washington DC Appendix Appendix 1: Financial Highlights Total revenue of £44.5 billion, up 8.4%, with improving trends in most markets through the year. Adjusted operating profit of £11.5 billion, a 2.5% decrease in a recessionary environment. Data revenue exceeded £4 billion for the first time and is now 10% of service revenue. £1 billion cost reduction program delivered a year ahead of schedule; further £1 billion program now underway. Final dividend per share of 5.65 pence, resulting in a total for the year of 8.31 pence, up 7%. Higher dividends supported by £7.2 billion of free cash flow, an increase of 26.5%. We are one of the world’s largest mobile communications companies by revenue with 341.1 million proportionate mobile customers, up 12.7% during the year. Improved performance in emerging markets with increasing revenue market share in India, Turkey and South Africa during the year. Expanded fixed broadband customer base to 5.6 million, up 1 million during the year. Comprehensive smartphone range, including the iPhone, BlackBerry Bold and Samsung H1. Launch of Vodafone 360, a new internet service for the mobile and internet. High speed mobile broadband network with peak speeds of up to 28.8 Mbps. Source Annual Report Vodafone 2010 Read More