Vodafone Digs Deeper to Cut Costs

A highly competitive environment has forced Vodafone Group plc (NYSE: VOD) to another swipe at its operating cost structure.

Vodafone reported half-year results today and announced that it will complete a £1 billion (US$1.7 billion) cost reduction program a year ahead of schedule as well as launch a new initiative to cut another £1 billion from its operating cost structure by 2012. (See Vodafone Reports Interim Result and Vodafone Adjusts to Hard Times .)

Vodafone isn't the only operator to step up cost-cutting measures lately. Across the pond, Sprint announced yesterday that it was shedding up to 2,500 jobs. Vodafone's cuts, however, do not at this stage involve headcount reductions, according to the operator's CEO Vittorio Colao. (See Sprint to Lay Off More Than 2,000 and Sprint Slashes 8,000 Jobs.)

The world's largest operator by revenue reported revenues for the first half of its financial year of £21.8 billion ($36.4 billion), up 9.3 percent on a reported basis compared with last year, helped by favorable currency exchange rates and merger-and-acquisition activity. But on an organic (that is, comparable) basis, group revenues were down 3 percent compared with the same period last year.

Group adjusted operating profit was up 2.4 percent on a reported basis to £6 billion ($10 billion) in the first half, but on an organic basis, adjusted operating profit was down 11.5 percent.

In Europe, despite strong mobile data growth, service revenues were down 4.5 percent compared with the same period last year. The growth in data and fixed-line revenues was not enough to offset voice revenue declines caused by market and regulatory price pressures in the region.

Mobile data revenues across the group increased 26 percent in the first half to £1.9 billion ($3.2 billion) compared with last year. Data revenues now account for 9 percent of Vodafone's service revenues.

Keeping those costs down
Colao broadly summed up where the initial £1 billion worth of cost savings came from on the half-year results call with analysts and media today. He said that 50 percent of the savings came from technology -- that is, "leveraging scale" -- and 30 percent came from marketing, while the remaining 20 percent came from overheads.

With another £1 billion of costs to cut, Vodafone says it will look to do more IT outsourcing, network sharing, and consolidation of network access and core service management. Additionally, Vodafone wants to improve call center effectiveness, consolidate logistics, rely more on the Vodafone Procurement Company, rationalize property and facility costs, and simplify management information systems. (See Net Sharing in the Slow Lane, Vodafone, Orange Revamp Network Share Deal, VOD, O2 to Share Networks?, and Will More Mobile Operators Dare to Share?)

— Michelle Donegan, European Editor, Unstrung