German and UK markets resonate with Safaricom as Vodafone (VOD.US) aims for full-year profit at the upper end of guidance

According to Zhitong Finance APP, UK telecom giant Vodafone (VOD.US, Vodafone) released its latest earnings report before the US market opened on Monday. Vodafone Group's service revenue growth in the first quarter exceeded analysts' consensus expectations, mainly due to better-than-expected sales in its largest market, Germany. Vodafone said in its earnings statement on Monday that service revenue for the fiscal quarter ended June grew by 5.2%, while analysts had forecast an average increase of around 4.6% based on data compiled by institutions.

CEO Margherita Della Valle has been committed to reviving growth at the UK telecom company and improving its share price performance. She has sold off underperforming telecom assets in Spain and Italy and focused on consolidating Vodafone’s position in core markets like the UK; in the UK market, Vodafone acquired equity assets from partner CK Hutchison Holdings Ltd., effectively gaining control of the country's largest mobile operator.

In Vodafone’s largest market, Germany, the company is working to regain lost ground. A legal change in Germany in 2024 banned landlords from bundling television and telecom broadband service fees with rent, resulting in Vodafone losing millions of customers. This reform broke the long-standing “automatic subscription + collective payment” model Vodafone had enjoyed in the German residential building market. Vodafone’s current recovery efforts focus on increasing broadband ARPU, developing enterprise digital services and wholesale revenues, rather than simply trying to recover all lost TV customers.

Prior to the German TV and Telecom Act reform, landlords or housing associations could sign bulk cable TV contracts with Vodafone for entire buildings, passing the costs onto all tenants via additional property charges. It was very difficult for tenants to opt out, even if they didn’t watch TV. As a result, Vodafone had a large-scale, low-churn, low-customer-acquisition-cost quasi-wholesale income stream. After the reform, tenants are free to choose whether to continue with cable TV as well as switch to IPTV, streaming, satellite, or other operators; Vodafone must now convert these former “passive-paying” users one by one into active contract customers. TV services usually served as an entry point for cable broadband, fixed-line telephone, and entertainment bundles. The decoupling of TV services makes it easier for competitors to vie for each household’s communication spend, weakening cross-selling and customer stickiness.

Although shareholders have responded positively to Della Valle’s initiatives—driving a more than 30% increase in Vodafone’s share price over the past 12 months—the streamlined telecom giant’s valuation remains far below the optimistic levels seen a decade ago. This month, French telecom billionaire Xavier Niel became Vodafone’s largest shareholder, agreeing to spend $6 billion to acquire more than a 16% stake from UAE’s telecom group. Less than a week later, Niel's Vega investment vehicle increased its holding, now owning about 18.8% of Vodafone.

Regarding the much-watched guidance, Vodafone raised its full-year post-lease adjusted EBITDAaL expectation (for the fiscal year ending March next year) to 13 billion euros (about $14.8 billion) to 13.3 billion euros (about $15.2 billion). The guidance adjustment reflects the important contribution from operations in Kenya and Ethiopia after Vodafone gained full control of Safaricom. Management said they expect to achieve at least the upper end of this range.

Africa and the Middle East are Vodafone's main sources of growth thanks to low market saturation. The African business integration brings together East Africa’s largest telecom operator Safaricom and South Africa’s largest mobile network operator Vodacom Group Ltd. This led to organic revenue in Africa growing sharply by 12.6% in the first fiscal quarter.

On Friday, Vodafone shares fell 1.3% in London to close at 114.60 pence, with a market cap of about £26.4 billion. After the UK market opened on Monday, at 8:15am London time, Vodafone shares jumped 3.7% to 118.80 pence thanks to the strong performance.

Although Vodafone raised its FY27 (fiscal 2027) adjusted EBITDAaL guidance from 11.9 billion–12.2 billion euros to 13–13.3 billion euros, about 1.1 billion euros of the increase will come from Safaricom's consolidation over the next nine months. Therefore, this is not a pure endogenous profit upgrade; adjusted free cash flow guidance remains at 2.6–2.9 billion euros because Safaricom’s consolidation this fiscal year is not expected to add to group’s adjusted free cash flow.

Germany’s recovery is no longer a ‘single-point gamble’! Vodafone's margin rise and faster expansion in Africa

For other performance metrics, Vodafone’s group total revenue in the first quarter of fiscal 2027 reached 10.294 billion euros, up 9.7% from 9.385 billion euros in the same period last year; service revenue rose from 7.858 billion euros to about 8.626 billion euros, up 9.8%. Adjusted EBITDAaL reached 2.932 billion euros, up 6.7% from 2.748 billion euros a year earlier, with organic growth of 6.2%. This growth outpaced total revenue growth, driving profit margins up by 0.6 percentage points to 28.5%, indicating that cost savings, scale effects, and improved business mix are starting to become operating leverage. Operating profit jumped from 1.015 billion euros to 3.873 billion euros, mainly due to around 2.976 billion euros of non-recurring profit from the Safaricom transaction, and thus cannot be considered sustainable operating profit.

The most strategically significant change is that the German business has truly moved past the “bottom” phase. Organic service revenue in Germany grew by 1.2% year-on-year, beating expectations, compared to a 3.2% decline a year ago; organic growth in fixed-line business was 1.3%, enterprise business in Germany grew 4.0%, and new broadband customers saw ARPU jump about 30% year-on-year—mainly driven by wholesale revenue, price hikes in consumer broadband, and growth in cloud, security, and SaaS business. This means the base effect from the 2024 changes to residential TV fee bundling has largely faded, and the operating strategy has shifted from pursuing low-priced customer numbers to enhancing per-customer value. However, the recovery is not complete: Germany lost a net 85,000 mobile contract customers, 98,000 broadband customers, and 55,000 TV customers, indicating that current revenue growth comes more from ARPU, wholesale, and improvements in enterprise digital services, not retail user expansion.

The UK business has entered the phase of “consolidation growth and synergy validation.” Driven by consolidation with Three UK, total UK revenue increased 22.2% year-on-year to 2.363 billion euros, and service revenue grew 20.8%. Excluding the impact of the merger, organic service revenue rose 0.6%, turning positive from a 0.2% contraction in the previous quarter. Organic growth in fixed business was 6.1%, with a net increase of 34,000 broadband households, 23,000 net additions in fixed wireless access, and Three’s contract customer churn rate down 1 percentage point year-on-year. However, organic mobile service revenue fell 0.7%, reflecting ongoing ARPU pressure from contract repricing and enterprise customer renewals. Network sharing is progressing ahead of schedule, with about 70% of the UK population now having access to VodafoneThree’s 5G service; management also confirmed that first-year substantive synergies are still set to be delivered on plan. Thus, the key next step for the UK is not further financial consolidation, but turning network integration and improved customer retention into tangible cost savings and cash flow.

The strongest growth elasticity remains in Africa, Turkey, and enterprise digital services. African total revenue grew 14.8% to 2.217 billion euros, with organic service revenue up 12.6%—accelerating from 10.9% in the previous quarter; Vodafone Cash-type revenue in Egypt rose 72.9%, Vodacom’s M-Pesa revenue in international markets rose 23.6% to 137 million euros, now accounting for 31.2% of relevant market service revenue. In Turkey, organic service revenue increased 30.2%, and after excluding the impact of hyperinflationary accounting, revenue in euro terms increased 8.3%; enterprise business grew 40.4%. Group-wide, Vodafone Business organic service revenue growth accelerated from 3.2% in the previous quarter to 5.0%, with digital service growth up 18.8% and now contributing 28% of enterprise service revenue, fueled by ongoing expansion in SaaS, IoT, cloud computing, cybersecurity, and sovereign cloud demand.

The core drivers behind Vodafone’s strong performance are four mutually reinforcing variables: normalization of fundamentals in Germany following regulatory shocks, driven by higher broadband prices, wholesale revenues, and enterprise digital services; expanded network scale and emerging customer and cost synergies in the UK thanks to the Three UK integration; structurally higher growth in Africa from data consumption and fintech businesses such as M-Pesa and Vodafone Cash; and group-level digital services scaling and cost efficiencies, enabling EBITDAaL growth to outpace revenue growth.

From an investment perspective, these results show Vodafone has moved from the “asset sale and balance sheet repair” slimming phase to the “actual revenue growth, margin expansion, and synergy realization” phase. However, further valuation rerating will still depend on whether churn in Germany narrows, mobile ARPU stabilizes in the UK, and free cash flow approaches the upper end of €2.9 billion—rather than relying only on Safaricom’s consolidation and one-off accounting gains.