By Kate Holton
LONDON (Reuters) - Vodafone said it did not expect any let-up in the pressures weighing on its business, as the world's second-largest mobile operator reported first-quarter results hit by regulation and recession across Europe.
The British group, which has been battling regulator-ordered price cuts, economic pressures and competition throughout its European markets, said on Friday it expected the next three months to follow broadly the same trends after reporting yet another sharp drop in its key revenue measurement.
With competition increasing in its once-reliable markets of Germany and Britain, and with Italy and Spain posting double-digit revenue falls, Vodafone posted a 3.5 percent drop in its key organic service revenue figure in the three months through June.
The fall in the measure - based on revenue coming from the provision of ongoing services and which strips out the impact of one-off costs such as handset sales - was slightly improved on the record 4.2 percent fall in the fourth quarter.
But it is still another sharp drop for a group that was posting growth only 12 months ago.
It said the performance was in line with its expectations, allowing it to reiterate its outlook for the year and sending its shares up half a percent.
"Conditions in Europe remain challenging in northern and central and southern Europe," Chief Executive Vittorio Colao told reporters.
The falls across the core region of Europe took the shine off some of Vodafone's better-performing businesses, including India which showed signs of stability and an increasing demand for internet services after years of a ferocious price war.
"Vodafone's first quarter was in line with consensus expectations but the detail points to a further deterioration in revenue trends in the core European businesses," analysts at Espirito Santo said.
The tougher competition in Germany has surprised investors who only last year saw the market as a haven of growth and high margins.
Vodafone, with 454 million mobile customers globally, reported a worse than expected 5.1 percent drop in service revenue in Germany, its biggest European market, and a 4.5 percent fall in Britain.
Spain, where Vodafone has struggled throughout the downturn, was down 10.6 percent and Italy down 17.6 percent, as customers sought to save money by making fewer calls and retaining older handsets, and as rivals stepped up competition.
It wrote down the value of its businesses in Italy and Spain by 7.7 billion pounds in the last financial year.
In response, it has sought to shore up its business by investing or buying fixed-line assets to enable it to offer a wider range of services, including the purchase of the country's largest cable operator Kabel Deutschland for 7.7 billion euros.
It has also moved customers on to a new tariff called Vodafone Red which enables users to pay a monthly fee dependent on how much data they want to use, and including unlimited calls and text messages for free.
EGR Broking managing director Kyri Kangellaris said Vodafone was a stock worth having for its dividend yield, although its results looked uninspiring. "Vodafone's quite a good yielder, but I wouldn't trade off these results," he said.
According to Thomson Reuters StarMine's "smartestimate" - which favors top-rated analysts - Vodafone is expected to have a 5.5 percent dividend yield over the next 12 months - above a forecast 3.8 percent from Britain's benchmark FTSE 100 index as a whole.
Investors have also bought into the British telecom firm in recent years in the hope that the group will sell its 45 percent stake in its joint venture in the United States in a deal that could exceed $120 billion.
Joint venture partner Verizon Communications has said it would like to buy out Vodafone, in what would be one of the world's biggest-ever corporate deals, but Colao said on Friday there was nothing new to report on the relationship between the two sides.
($1 = 0.6579 British pounds)
(Additional reporting by Sudid Kar-Gupta; Editing by Rhys Jones and David Holmes)