By Paul Sandle
LONDON (Reuters) - Vodafone, the world's second largest mobile operator, said it was "pausing" the deployment of Huawei equipment in its core networks until Western governments resolve concerns about the Chinese firm's activities.
Huawei faces increasing scrutiny over its ties with the Chinese government and has denied allegations that its technology could be used by Beijing for spying.
Vodafone's Chief Executive Nick Read said on Friday after reporting third-quarter results that the debate was playing out at a "too simplistic level", adding that Huawei was an important player in an equipment market dominated by three companies.
"Given that, we have decided to pause further Huawei in our core whilst we engage with the various agencies and governments and Huawei just to finalise the situation, of which I feel Huawei is really open and working hard," he said.
Read said Huawei's equipment was used in Vodafone's core - which he described as the intelligent part of the network - in Spain and some other smaller markets.
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Huawei overtook Sweden's Ericsson to become the world's biggest telecoms equipment maker earlier this decade, despite being shut out of the U.S. market. The third major player is Nokia.
A Huawei spokesman said it had been a long-term strategic partner to Vodafone since 2007, adding that Huawei understood Vodafone was only pausing deployment in its core networks in Europe.
"Huawei is focused on supporting Vodafone's 5G network rollouts, of which the core is a small proportion," he said.
"We are grateful to Vodafone for its support of Huawei and we will endeavour to live up to the trust placed in us."
Read said Europe's mobile industry would face higher costs and delays to faster networks if authorities imposed a blanket ban on Huawei equipment, particularly the radio technology deployed on mobile towers.
"It would be a significant implication for the European telco industry, for capital costs and 5G roll-out, which would face a significant delay," he said.
TOUGH END TO YEAR
Vodafone reported a deterioration in its key revenue measure in the third quarter, down 40 basis points quarter-on-quarter to 0.1 percent, reflecting continuing price competition in Spain and Italy and a slowdown in South Africa.
Analysts had expected growth of 0.3 percent.
Shares in the company fell to their lowest level since July 2010 after the update, and were trading down 2.3 percent at 141 pence at 1019 GMT.
It said however that competition in the Spanish and Italian markets had moderated through the quarter and it improved its level of churn, or the number of customers leaving, by two percentage points year-on-year.
"Lower mobile contract churn across our markets and improved customer trends in Italy and Spain are encouraging, however these have not yet translated into our financial results," Read said.
Chief Financial Officer Margherita Della Valle said the performance improvements would start to show in the top line after the current quarter.
"We expect as we enter into the next fiscal year to start seeing the benefits in terms of revenue growth," she said.
Analysts at UBS said Vodafone performed well in net adds and churn across Europe, but they expected fourth quarter service revenue to drop to -0.5 percent, driven by weakness in Spain and tougher comparatives in Britain.
"This is disappointing relative to prior comments that service revenues would be similar to the +0.5 percent seen in Q2," they said.
Vodafone's reiterated its guidance for this year of around 3 percent growth in underlying adjusted core earnings, with free cash flow before spectrum costs of about 5.4 billion euros.
(Editing by Kate Holton and Alexander Smith)