Vodafone hit by downturn

Vodafone has cut its revenue outlook, knocking confidence in the telecoms sector and dragging down shares in European rival Telefonica and supplier Ericsson.

The world's biggest mobile group by sales was hit by consumers delaying buying new phones, sending its shares to a 20-month low and wiping about 10 billion pounds (NZ$26.68 billion) off its market value.

Ericsson reported better-than-expected results but these were overshadowed by Vodafone's warning of a tough economic outlook and the news reverberated throughout the sector, hitting Spain's Telefonica and others.

"We are beginning to see an impact from the current economic environment which is greater than we expected," outgoing Vodafone Chief Executive Arun Sarin told investors and analysts on a conference call.

Collins Stewart analyst Mark James said telecoms companies had shown remarkable resilience to date to the macro-economic slowdown, but Vodafone had kicked off the telecoms results season with a reminder that nobody was immune.

Dutch KPN, Norway's Telenor, Nordic operator TeliaSonera and Belgium's Mobistar and Belgacom are all due to report quarterly results later this week.

"This shatters the widespread perception that Vodafone will be defensive in a weakening economy," Investec analyst Jonathan Groocock said.

"The Spanish and UK telecoms markets, resilient to the economic slowdown to date, finally look to have cracked."

The biggest single cause of Vodafone's woes was an unexpectedly sharp fall in the Spanish market, where large numbers of immigrant construction workers who had been Vodafone customers left the country as the housing market slowed.

Vodafone said it said seen smaller but similar effects in other countries and said it was hard to tell how much it had been hurt by the economy and how much by competition. "Clearly, both factors are there," said CEO-designate Vittorio Colao.

Vodafone shares fell 14.4 per cent to 127.9 pence by 1051 GMT, pulling the European telecoms index shares down 7.8 per cent. Telefonica shares fell 7.5 per cent, Deutsche Telekom 6.4 per cent and France Telecom 4.4 per cent.

Credit markets reacted with widening spreads.

Telecom equipment maker Ericsson reported better-than-expected second-quarter earnings and reiterated it expected a flat mobile infrastructure market this year, but its shares could not escape Vodafone's pull and fell 8.3 per cent.

"The hard-tested Ericsson share is falling significantly today. . . not due to the results themselves, but that Ericsson's customer, Vodafone, is out with a significant forecast downgrade," Jyske Bank said in a note to clients.

Margins at the Swedish company's key business in telecoms networks faced continued pressure as new rollouts, rather than more lucrative upgrades to existing networks, made up a surprisingly large share of its business in emerging markets.

Ericsson had singled out the high share of new networks in its sales mix as the main reason for a collapse in third-quarter earnings last year, which led to a run on its shares.

Vodafone left its capital expenditure plans unchanged for now, but indicated it had no urgent need to expand network capacity in response to higher demand for third-generation services such as video or internet browsing.

"For the time being, we are well within our capacity limits," Colao said on the conference call.

Michael Kovacocy, European telecoms analyst at Daiwa SMBC, argued the Vodafone results showed European mobile markets were saturated and revenue growth ever harder to come by.

"We think the real story here is just competitive pressures and saturated markets," he said.