Vodafone Group PLC (VOD.US) reported stronger-than-expected first-quarter service revenue growth on Monday, driven by a surprise sales increase in its largest market, Germany. The telecom giant posted a 5.2% rise in service revenue for the quarter ending June, beating the average analyst estimate of approximately 4.6%.
CEO Margherita Della Valle has been focused on revitalizing growth and improving the company's share price. She has already sold underperforming assets in Spain and Italy and is working to strengthen core markets, including the UK, where Vodafone has gained control of the country's largest mobile operator by acquiring a stake from CK Hutchison Holdings Ltd.
In its largest market, Germany, Vodafone is working to recover from a 2024 legal change that prohibited landlords from bundling TV and broadband fees with rent. This reform caused a significant loss of customers, breaking Vodafone's long-standing "automatic subscription and collective payment" model in residential buildings. The company's recovery strategy now focuses on increasing broadband ARPU, developing enterprise digital services, and growing wholesale revenue, rather than simply trying to win back all lost TV customers.
Before the reform, landlords could sign bulk cable TV contracts with Vodafone, passing the cost on to all tenants as an additional charge, making it difficult for tenants to opt out. This provided Vodafone with a large, low-churn, and low-cost wholesale revenue stream. Now, tenants can choose their own TV services, forcing Vodafone to convert former "passive payers" into active customers. TV often serves as an entry point for bundled broadband, fixed-line, and entertainment services, and losing this connection makes it easier for competitors to capture the entire household's communications spending, weakening cross-selling and customer loyalty.
While shareholders have responded positively to Della Valle's efforts, driving Vodafone's share price up over 30% in the past 12 months, the company's valuation remains well below its levels from a decade ago. French telecom billionaire Xavier Niel became Vodafone's largest shareholder this month, acquiring over 16% of the company for $6 billion. He later increased his stake to approximately 18.8% through his investment vehicle, Vega.
Regarding the outlook, Vodafone raised its full-year guidance for adjusted EBITDA after leases (EBITDAaL) to a range of €13.0 billion to €13.3 billion, up from €11.9 billion to €12.2 billion. The company stated it expects to achieve at least the upper end of this range. The upgrade reflects the full consolidation of Safaricom, which brings contributions from its Kenyan and Ethiopian operations. Africa and the Middle East, with lower market saturation, are key growth drivers. The African business integration combines Safaricom, East Africa's largest telecom operator, with Vodacom Group Ltd., South Africa's largest mobile network operator. This organic revenue in Africa surged 12.6% in the first quarter.
Vodafone shares, which closed at 114.60 pence last Friday, rose 3.7% to 118.80 pence in London trading on Monday morning following the strong results. While the EBITDAaL guidance increase includes about €1.1 billion from Safaricom's consolidation over the next nine months, it is not purely organic. The guidance for adjusted free cash flow remains unchanged at €2.6 billion to €2.9 billion, as the consolidation of Safaricom is not expected to contribute to group free cash flow this fiscal year.
Germany's Recovery Is No Longer a "Single-Point Risk" as Margins Rise and African Operations Accelerate
For the first quarter of fiscal 2027, group revenue rose 9.7% to €10.294 billion, with service revenue up 9.8% to €8.626 billion. Adjusted EBITDAaL grew 6.7% to €2.932 billion, or 6.2% on an organic basis, outpacing revenue growth and improving the margin by 0.6 percentage points to 28.5%. This indicates that cost savings, economies of scale, and an improved business mix are beginning to translate into operating leverage. Operating profit jumped from €1.015 billion to €3.873 billion, largely due to a non-recurring gain of approximately €2.976 billion from the Safaricom transaction.
The most significant strategic change is that the German business has truly passed the "stabilization" phase. German organic service revenue grew a better-than-expected 1.2%, compared to a 3.2% decline in the same period last year. Fixed-line business grew organically by 1.3%, and the German enterprise business grew by 4.0%. New broadband customer ARPU increased by approximately 30% year-on-year, driven by wholesale revenue, consumer broadband price increases, and growth in cloud, security, and SaaS services. This suggests the impact of the 2024 residential TV fee bundling reform has largely subsided, and the strategy has shifted from chasing low-value customer numbers to increasing unit customer value. However, the recovery is not complete: German mobile contract customers decreased by 85,000, broadband customers by 98,000, and TV customers by 55,000, indicating that current revenue growth is more from ARPU, wholesale, and enterprise digital services than from retail customer expansion.
UK Business Enters a Phase of "Consolidated Growth and Synergy Verification"
In the UK, the consolidation of Three UK led to a 22.2% increase in total revenue to €2.363 billion, with service revenue growing 20.8%. Excluding the acquisition, organic service revenue grew 0.6%, turning positive from a 0.2% decline in the previous quarter. Fixed-line business grew organically by 6.1%, with a net addition of 34,000 broadband customers and 23,000 fixed wireless access customers. The churn rate for Three's consumer contracts improved by 1 percentage point year-on-year. However, mobile service revenue fell organically by 0.7%, reflecting the impact of contract price adjustment timing and enterprise customer renewals on ARPU. Network sharing is ahead of schedule, with approximately 70% of the UK population now able to access VodafoneThree's 5G services. Management confirmed that the first-year material synergies are on track. The key for the UK is not just the consolidation but whether network integration and improved customer retention can be translated into verifiable cost savings and cash flow.
Africa, Turkey, and Enterprise Digital Services Show Strongest Growth
Africa remains the most resilient growth engine. Total revenue in the region grew 14.8% to €2.217 billion, with organic service revenue growth accelerating to 12.6% from 10.9% in the previous quarter. Revenue from Egypt's Vodafone Cash grew 72.9%, while M-Pesa revenue for Vodacom's international markets grew 23.6% to €137 million, now accounting for 31.2% of service revenue in those markets. In Turkey, organic service revenue grew 30.2%, or 8.3% in euro terms after accounting for hyperinflation. Enterprise business in Turkey grew 40.4%. Group Vodafone Business organic service revenue growth accelerated to 5.0% from 3.2% in the previous quarter, with digital services growing 18.8% and now contributing 28% of enterprise service revenue, driven by expanding demand for SaaS, IoT, cloud computing, cybersecurity, and sovereign cloud services.
The core drivers behind Vodafone's strong performance are four mutually reinforcing variables: the normalization of the German business following the regulatory shock, driven by broadband price increases, wholesale revenue, and enterprise digital services; the UK's integration with Three, expanding network scale and beginning to deliver customer retention and cost synergies; Africa's data consumption and fintech businesses like M-Pesa and Vodafone Cash providing structural growth well above Europe; and group-level digital service expansion and cost efficiency improvements, which have allowed EBITDAaL growth to outpace revenue growth.
From an investment perspective, this report shows that Vodafone has transitioned from a phase of "selling assets and repairing the balance sheet" to a phase of "actual revenue growth, margin expansion, and synergy realization." However, further valuation re-rating will depend on whether German customer losses narrow, UK mobile ARPU stabilizes, and free cash flow can approach the upper end of the €2.9 billion guidance, rather than relying solely on the Safaricom consolidation and one-time accounting gains.
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