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UPDATE: Vodafone Plunges on Weak 1Q; Low-End Fiscal Year

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LONDON (Dow Jones) Vodafone Group shares fell over 12% in early trade Tuesday after the mobile phone group said it now expects full year revenue at the low end of its guidance, flagging a weakening economy which analysts believe could be the start of a worsening trend.

The world's largest mobile operator by revenue blamed the bottom-end full year sales expectations on recent economic weakness, lower-than-expected equipment revenue and its first quarter performance, in which sales rose 19.1%.

Still, the rise in first-quarter sales belies weakness in both its European operations, dragged down by Spain, and its high-growth Emerging Markets, Asia Pacific and Affiliates (EMAPA) region, which has suffered from competitive and regulatory pressure in Turkey as well as slower growth in Romania and Egypt.

Revenue across the group in the three months to June 30 rose to GBP9.82 billion from GBP8.25 billion, just ahead of analysts' average expectations of GBP9.81 billion.

In Europe sales rose 15.5% to GBP7.18 billion predominantly driven by the strength of the euro. On an organic basis, revenue shrunk 0.2%.

Vodafone's Spanish operations dragged down its European sales with a 2.5% service revenue decline, as the macroeconomic environment in the country deteriorated.

Chief executive Arun Sarin told reporters on a conference call that the company had been particularly affected because it has a strong customer base among migrant workers and small-to-medium sized construction firms that have been hurt by the housing slump and economic slowdown.

Spain's Telefonica also took a beating, falling 5.6% at the open as the market weighed up the potential read-across for other European mobile phone operators.

Collins Stewart analyst Mark James believes the whole sector will trade down on Vodafone's numbers, with Telefonica particularly weak.

"Telecoms results, globally, have shown remarkable resilience to date to the economic slow down, but Vodafone has kicked off the telco results season with a reminder that nothing is immune," he said in a note to clients.

The broker downgraded Vodafone to hold from buy and put its target price of 152 pence under review.

The malaise in the world economy was not limited to Europe, with Vodafone flagging lower-than-expected equipment revenue as another key pressure on full year revenue.

This reflects customers' move to SIM-only deals which offer lower phone tariffs, rather than upgrading their handsets and paying higher mobile prices.

While Vodafone will lose revenue on shunned handsets, low or no margins means this won't hurt the profit line.

But the move to SIM-only deals is an indication of tightening consumer conditions and Sarin said the trend is evident across Europe and EMAPA.

Sales in the EMAPA region grew 30.5% to GBP2.64 billion, although organic growth narrowed to 9.6% from 12.6% in the previous quarter.

Vodafone attributed this decline to lower growth in Romania and Egypt, both of which have come under increasing competitive pressure, and to the inclusion of Turkey in its organic figures for the first time.

Turkey is also struggling under the weight of regulatory and competitive pressure compounded by a general economic slowdown.

Vodafone Tuesday guided the market to the low-end of its full-year sales range of GBP39.8 to GBP40.7 billion, although it reiterated operating profit and cash flow guidance which it will maintain through cost reductions.

The group continues to expect adjusted operating profit in the range GBP11.0 billion to GBP11.5 billion and free cash flow of GBP5.1 billion to GBP5.6 billion.

However concerns remain that the decline in revenue is a sign of further troubles to come, with one analyst commenting that "given the economic situation, we would expect this trend to worsen."

At 0815 GMT Vodafone shares were down 12.7%, or 19 pence at 130 pence, making it the biggest faller in percentage terms on the FTSE100 blue-chip index. Telefonica shares were also down 6.3% or EUR1.09 at EUR16.19, with other major telcos also trading lower across Europe.

By Kathy Sandler, Dow Jones Newswires; 44-207-842-9293; kathy.sandler@dowjones.com

(END) Dow Jones Newswires

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