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By Ron Coates, 25 May 2004 18:15

NEWS Vodafone shares dropped six per cent today as the company announced pre-tax profit up 19 per cent, turnover up ten per cent and free cash flow only beaten in the sector by Microsoft. It also declared a £9bn loss after a £15.2bn amortisation.

Despite all these good things, and a dividend up 20 per cent, the stock market punished the company by marking the shares down by six per cent to 128p at close today.

Robin Han, senior analyst at Ovum, said: "I think it was a bit harsh, an over-reaction. It might have been because of the situation in Japan, but we didn't expect good news there, we know all that. In the sector, I think only Microsoft generates more free cash."

Vodafone CEO Arun Sarin and his team provided a solid front with coherent plans for world domination when they presented the results. At the end of the presentation there was rather a stunned silence and it took the assembled analysts around 30 seconds to start thinking of any questions. Sarin almost made it out the door before they started.

However, the weekend papers had been full of leaked stories from shareholders who definitely wanted to see some cash. Obviously a dividend up 20 per cent to 2.0315p and the promise of a share buy-back of £3bn on top of the £1.1bn already spent this year wasn't enough. Cash now, in the hand, preferably in huge dividends, was what was wanted.

Sarin's team knew this. Barely a sentence went by without an emphasis on only buying at the right price and if it increases shareholder value. About a third of the rest of the presentation was about cutting costs out of the organisation.

Around the same volume level was the emphasis on the One Vodafone strategy and how it would cut the costs of development, testing and rollout of new services and devices. There were a lot of remarks about using purchasing power with the device makers.

Key to the future was the plan for doing the design and testing phase once and then rolling out the product many times in markets around the world. The management promised that this would follow a best practice model – it definitely wasn't centralisation.

In terms of regions, Vodafone will be concentrating its investment in Europe, particularly France, Italy and Eastern Europe - that is, after it has spent £2.6bn taking complete control of its Japanese subsidiary.

In terms of innovation the company pointed out that it had launched BlackBerry in eight countries and had plans for other handheld devices. Vodafone Office had received an "extraordinary reception," according to management, and there would be more muscle behind that.

Vodafone live! is simply motoring away, said three of the board on separate occasions.

One plaintive analyst asked if the long-promised dual mode device that would allow Verizon users to take their phone across the Atlantic would ever appear. It's here, being rolled out in the US and coming to Europe, cried the Vodafone team.

Furthermore, dual-mode datacards are also almost here. And datacards are already a runaway success in chosen European markets and would be in more.

New terminals would come out every seven days, on average. In Japan, the company says it has a "full portfolio" of manufacturers designing devices that will help Vodafone rebound in 3G in the Christmas market.

Data revenue, mostly SMS, makes up 16 per cent of revenue. When an analyst pointed out that Vodafone had predicted three years ago that it would make up 20 per cent, Vodafone confessed that this was true, but that they hadn't expected to make so much money out of voice – the revenue figures were right, but the proportion wasn't.

Next year, said Sarin, Vodafone would see high single-digit growth in customers and the same in revenue. The increased costs of rolling out 3G would be offset by the One Vodafone project's efficiencies. Free cash flow would be about the same, if you strip out one-off hedging gains of £1.2bn and some other one-offs, at £7bn.

But it still wasn't enough for the market.