Copyright (c) 2004, 
Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.THE WORLD'S BIGGEST cellphone company by sales touts its global empire as a "unique advantage" over its smaller rivals.
Vodafone Group PLC, however, doesn't own 100% of all its far-flung operations, which span 26 countries. Instead, the company in many cases owns stakes in these businesses that can range from as little as 3% to as much as 90%.
This patchwork of interests makes it tough for investors to decipher Vodafone's financial statements. Also, how Vodafone accounts for these businesses can make it appear as if the company is growing faster than it really is. The confusion may become more pronounced next year when the U.K. company switches to new, international accounting standards.
When Vodafone gives investors guidance on two key measures -- revenue and customer count -- it includes results from businesses it doesn't actually control. It calls those numbers "proportionate" since they include a portion of results from the units in which it owns stakes.
Consider revenue. Vodafone's use of proportionate -- also known as pro forma -- figures means that investors often see two different figures: pro forma revenue and reported revenue. For example, Vodafone's proportionate revenue includes 45% of the revenue generated by Verizon Wireless, the leading U.S. cellphone service provider, in which it owns a 45% stake, and 3% of the revenue registered by China Mobile (Hong Kong) Ltd., in which it has a 3% holding.
By contrast, in its official financial statements, Vodafone includes only sales from assets that the company controls, in line with generally accepted accounting principles. In the fiscal year ended March 31, reported revenue was GBP 33.6 billion ($60.5 billion). Vodafone reported proportionate revenue of GBP 39.4 billion for the same period.
While the reported and proportionate figures are different, until recently they have grown at fairly similar rates. Now that is changing because many of the businesses in which Vodafone has a minority stake, notably Verizon Wireless, are growing much faster than its wholly owned subsidiaries, analysts say.
For example, Vodafone forecasts that its proportionate revenue from cellular services will show high-single-digit percentage growth for the fiscal year ending March 31, 2005. But Goldman Sachs expects Vodafone's reported revenue to grow only 1.6% in that period.
"Vodafone does not control some of the cash flows from some of its best assets," says Steven Hewitt, a fund manager with Threadneedle Investments in London, which owns about 1.4% of Vodafone's stock. "Looking at proportionate revenues and operating profits does not necessarily give you a good indicator of Vodafone's growth potential."
Many investors have been increasingly skeptical of pro-forma figures since the tech-stock bubble burst, and the U.S. Securities and Exchange Commission has warned investors not to rely on them. As a result, most cellphone companies in Europe and the U.S. don't give pro-forma guidance on revenue. Cellphone maker Nokia Corp., which long used pro-forma figures to guide investors, dropped the practice at the start of this year.
Even so, some investors and analysts like Vodafone's proportionate- revenue forecasts. They say these forecasts are a good guide to net profit or loss because that bottom-line figure ultimately includes earnings from noncontrolled assets. "The proportionate numbers are the only gauge you have got of the assets that are not consolidated," says Marco Pirondini, head of global equity research at Pioneer Investments, a Vodafone shareholder, in Boston.
A spokesman for Vodafone says, "Proportionate guidance is a better overall indicator of the performance of all the investments in which the company has an interest." The company has long used proportionate figures and uses them consistently, even when they were weaker than reported numbers, he adds. "It is not about embellishing the guidance."
In addition, Vodafone isn't breaking any regulation by presenting proportionate figures because they aren't included in its official financial statements. Plus, it complies with U.S. rules governing pro- forma results by accompanying them with reported figures and showing how the two sets of figures differ.
Still, Vodafone's use of proportionate figures makes it difficult for investors to figure out even one of the most basic measures of a company's business: the number of customers it has. Here, too, Vodafone gives different tallies.
Its proportionate customer count, which includes some customers who use the cellphone services of a company in which Vodafone simply has a stake, was 133 million at the end of the last fiscal year. What the company calls "venture customers," or the total number of customers in all the companies in which Vodafone has a stake, was 340 million. By contrast, customers in operations Vodafone controls came to 108 million, all for the end of the most recent fiscal year.
The Vodafone spokesman says the company gives prominence to the proportionate-customer number, but some investors also ask for the venture number, too. Customer figures aren't part of a company's official financial results and so don't have to conform to any particular set of accounting standards.
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Proportionally Speaking . . .
Vodafone doesn't have control of some of its fastest growing assets.
Operators by subscriber growth:
MILLIONS OF SUBSCRIBER GROWTH, VODAFONE'S
OPERATOR COUNTRY SUBSCRIBERS* FISCAL YEAR 2004** STAKE***
Mobifon Romania 4 37% 20%
Vodacom South Africa 10 24 35
China Mobile China 150 21 3
Polkomtel Poland 6 19 20
Verizon Wireless U.S. 39 17 45
Vodafone Germany 25 9 100
Vodafone Italy 21 9 77
Vodafone Greece 4 9 99
SFR France 14 8 44
Vodafone Spain 10 7 100
Vodafone Japan 15 7 88
Swisscom Mobile Switzerland 4 6 25
Vodafone U.K. 14 6 100
Belgacom Mobile Belgium 4 2 25
* As of March 31, 2004
** Ended March 31, 2004
*** As of June 30, 2004
Note: Table includes only operations with more than 3.5 million subscribers
Source: Vodafone
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