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Tuesday, 13 November, 2001, 15:39 GMT
Vodafone and Marconi: The figures explained

Troubled telecoms equipment firm Marconi and mobile phone giant Vodafone both report huge headline losses on the same day - yet one suffers a storm of negative comment and the other is praised by the markets. What's the difference?

Why is a huge loss a good result for Vodafone but a bad one for Marconi?

Marconi's losses triggered a fall in the company's shares, while Vodafone's were met with a buying frenzy.

For both companies a sizeable proportion of the heavy headline losses is an accounting device.

Both paid vast sums to acquire other firms at the height of the technology boom.

And both must now write off a large chunk of the money they paid as "goodwill" - effectively the difference between what was paid and what the actual assets of the company concerned are worth.

The difference lies in the prospects for the two companies. Vodafone is a business worth more than 100bn, with 95 million subscribers in 28 countries around the world.

Marconi, on the other hand, has debts thought by some observers to exceed its assets - in other words, some believe it is technically insolvent.

Having refocused out of defence and into telecoms with truly disastrous timing, just before the tech bubble burst, Marconi's market value has plunged from about 35bn a year ago to less than 900m today.

Vodafone's purchases are generally seen as a strategically sound, if expensive, buy. Marconi's are with hindsight regarded as hubristic.

But how can Vodafone be making a huge profit and a huge loss at the same time?

Vodafone, in common with many technology companies, reckons its earnings in a number of different ways.

Because of the huge set-up costs of telecoms networks, for instance, the interest on debt and the depreciation of the value of the equipment is seen as distorting the question of whether the business' operations are working well or not.

So in comes the idea of Ebitda - earnings before interest, tax, depreciation and amortisation - also known as "core earnings".

On this measure, Vodafone made a six-month profit of 4.8bn, up 46% on the year before.

That indicates that cash is flowing freely through the business, and that its raw operations are making money.

Pre-tax losses are a different matter. The combination of amortising the goodwill - writing it down over a period of years - and other exceptional one-off charges took over 13bn off the Ebitda, leaving a pre-tax loss of 8.4bn.

Isn't Marconi doing badly enough as it is? Can it get any worse?

Opinions are divided as to what kind of future Marconi can expect.

Some look at a 19% dive in sales - coupled with a 25% dive in sales of telecoms equipment, its core business - and say that with the tech market in tatters, the company is doomed.

Others, though, commend the company for finally being up-front with its investors and ditching its reputation for arrogance along with its ex-chief executive and chairman.

And they say that one of its core products - a network technology called SDH - should provide a revenue stream for some years to come.

The more negative observers say SDH is out of date. But with telecoms operators unwilling to spend billions on new networks, repair and maintenance of existing SDH networks is where the money is.

But none of that matters unless it can sort out its multi-billion pound debt.

Banks and bondholders are arguing over who gets first call on the company's assets should anything go wrong - and at any time in the next 16 months, during which bondholders can demand their money back, everything could fall apart very quickly.

So why is Vodafone a better bet?

Simply put, Vodafone is seen by investors as a company for the future; Marconi is lumbered with the image of a company of the past.

As sales of desktop PCs flatten out, most analysts see a shift to accessing data through handheld devices over the next five years, a development on which big mobile operators like Vodafone are in prime position to capitalise.

So while Vodafone also carries a great deal of debt, its assets are 100 times more valuable, its sales are growing, and its prospects are sound.

But the provision of equipment for telecoms networks - Marconi's stock in trade - is seen as a business where the profit margin will continue to fall.

And there are many larger, better funded competitors to make Marconi's life difficult.

Marconi has a great deal of work to do not just to regain the respect of investors - but simply to survive.

See also:

13 Nov 01 | Business
Telecoms struggle with huge losses
13 Nov 01 | Business
Marconi losses reach 5.1bn
13 Nov 01 | Business
Vodafone earnings beat expectations
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