One wonders how long Vodafone will put up with losing money in Australia.
So far, Australia's third-largest mobile telecommunications company behind Optus and Telstra Corporation Ltd (ASX: TLS) has been losing money hand over fist for years.
Vodafone is a 50/50 joint venture between Vodafone Group PLC and Hutchison Telecommunications (Aus) Ltd (ASX: HTA). Hutchison itself is 88% owned by Hutchison Whampoa – a diversified global conglomerate headquartered in Hong Kong, and 10% by Spark New Zealand Ltd (ASX: SPK) ex-Telecom New Zealand.
Ongoing losses
By reviewing the accounts of Hutchison Telecoms, we get to see half the results of Vodafone in Australia – and as you'll see – they aren't a pretty picture.
In the latest half-year results, Hutchison reported a loss of $90 million, which was at least less than half the $222.5 million loss reported for the six months to December 2014. But they were still higher than the last half loss of $79.3 million. Since 2009, Vodafone has posted losses of $2.5 billion, according to my calculations based on Hutchison's annual reports. That's a substantial amount of money, and the current trend suggests more losses are yet to come. Revenues have also dropped significantly since December 2009.
Falling customer base
Over the same period, Vodafone has seen its total customer base fall 30% from 6.9 million to 4.9 million currently. Optus has grown its customer base by 10% to 9.4 million and Telstra a whopping 58% to 16.4 million devices (although that also includes other mobile devices and customers). In the latest half to June 2015, Vodafone saw 47,000 net customers jump ship, indicating the telco still has some issues.
Increasing customer numbers has seen Optus and Telstra have grown their mobile revenues – while Vodafone's has more than halved. Incidentally, Telstra earns more in annual mobile revenues than both Optus and Vodafone combined.
Vodafone certainly generates substantial revenues, with Hutchison's 50% share of sales in 2014 coming to $1.75 billion, indicating total revenue of $3.5 billion, compared to Optus' $5.5 billion and Telstra's $9.7 billion.
What next for Vodafone?
Turning that into profit is the problem for Vodafone. The question is, will Vodafone continue to stick through the losses and the large capital expenditure it has already thrown at its mobile network and continues to spend in Australia? Perhaps it's easier to do that than sell out at a massive loss, take a long-term approach and hope that works out.
A potential merger or sale of the mobile phone operations to the likes of TPG Telecom Limited (ASX: TPM) can't be ruled out. That would allow the new entity to cross-sell services, cut costs and perhaps finally generate consistent profits.
Spark's 10% stake in Hutchison has been rumoured to be up for sale a few times, but it's unlikely the NZ telco would be interested in a large stake in an Australian telco given the huge losses it incurred with AAPT here as Telecom NZ. At the same time, I can't imagine that Spark are all that keen to retain their 10% interest and I could easily see this being sold to the likes of the acquisitive TPG Telecom.
Foolish takeaway
The road ahead for Vodafone appears forked. Choosing to merge or sell off its mobile network could be the best move to limit losses and allow Australia's third mobile network to grow and thrive. The other road appears much harder. Attempt to make Vodafone profitable while continuing to pour billions in capital expenditure and marketing while facing ongoing losses.
I know which one I'd choose.
