Despite a tough year for the mobile phone operator, its chief executive is confident of modest improvement, writes Mary Canniffe, Investments Editor

Concern about its future prospects will continue to dog Vodafone shares for some time in difficult and volatile telecoms markets.

Despite reporting a better-than-expected operating outcome for the 12 months to end-March, which initially boosted the shares, Vodafone shares closed down 2.1 per cent at 103p sterling yesterday after a 7 per cent fall on Monday

The mobile telephone group reported earnings before interest, tax, depreciation and amortisation (EBITDA) and before exceptional items of £10.1 billion sterling (€10.9 billion) for the year, a rise of 44 per cent.

Operating profit before goodwill amortisation and exceptional items was up 35 per cent to £7.04 billion while operating cash-flow per share was up 60 per cent to 11.92p.

The operating result was ahead of most market expectations. After assets write-downs and other exceptional charges of £19.7 billion, the group, once Britain's biggest company, reported a pre-tax loss of £13.5 billion.

Against expectations, Vodafone made no impairment charge for its mobile assets and its £6 billion impairment charge against other assets was lower than expected.

Initially, the market liked the results and the shares recovered from Monday's slide to touch 113.75p in early trading.

As the results were analysed and the outlook assessed, the early share price bounce was pared back. At 103p sterling, the shares are now down almost 60 per cent so far this year.

The 480,000 former Eircom shareholders who got their Vodafone shares when the British group bought Eircell in a €4.5 billion all-share deal had already seen the Vodafone share price drop from 245p sterling when the deal was first announced in December 2000 to 203p five months later when the deal was consummated.

With the price now at 103p, what are Vodafone's Irish shareholders to do?

The real problem in trying to assess the future direction of Vodafone shares is the lack of visibility in the overall telecoms market. The outlook for growth in the crucial average revenue per user measure in European markets is unclear.

The sector, which has paid high prices for new generation 3G mobile licences, is now at a critical stage with an increasingly mature mobile market and flat average revenue per user in a competitive marketplace.

Vodafone needs to drive up its revenue per user by increasing its non-voice as well as its voice service revenues and to achieve a successful roll-out of the new 3G technology, which would allow new higher margin applications.

The extent of demand for data services in European markets will be critical but the level of customer interest is unclear at this stage. So far the roll-out of terminals and applications has been slower than expected.

Chief executive Sir Christopher Gent expressed confidence in the continued growth potential of the business yesterday, forecasting "a modest but real improvement" in average revenue per user in most of its major European markets this year.

His confidence was reflected in the decision to increase the full- year dividend by 5 per cent to 1.4721 pence per share. Despite group optimism, the bad news is that analysts are generally negative on the outlook.

Nomura yesterday reiterated its "sell" recommendation on the shares, stating that customer growth was slowing and spending was flat.

Vodafone benefited last year from strong conditions in European markets with organic growth and a doubling of margins in major markets compared to the lows of the 2000 price war, according to Nomura.

"As competition intensifies, we remain of the view that revenues and margins will come under pressure," it warned.

At ABN Amro, analysts said the results showed "no clear upward catalysts".

Stating it did not expect to see positive news flow over the course of the summer, it forecast the shares would be at the bottom end of a 100p to 120p price range.

Former Eircom shareholders who sell now will crystallise losses of about 50 per cent on the Vodafone holding.

For those who hold on, there is the chance of some upside but in markets that are expected to remain volatile there are no guarantees.