By Paul Sandle
LONDON (Reuters) - Vodafone expects a bigger rise in profits this year after investment in faster networks boosted demand in Europe and helped the group return to underlying revenue and core earnings growth in the year just ended, the first annual rise since 2008.
Chief Executive Vittorio Colao said on Tuesday a strong year for the world's second mobile operator had been capped by a recovery in the last quarter in Europe, its largest region which has taken more than five years to nurse back to health.
"We achieved the first quarter of positive revenue growth in Europe since December 2010," he said, referring to the group's performance in the three months to March 31.
In Germany, Vodafone was "back in the game" against former incumbent Deutsche Telekom, while Italy, its second largest market in Europe behind Germany, also recovered in the final quarter, he said.
Its performance in its home market was marred by problems with a new billing system. Colao said the business should be back to normal in the second half of the year.
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The company has been spared becoming the smallest mobile network operator in the UK market after Europe stopped Hutchison, the operator of the smallest network Three, buying Telefonica's second-placed O2 on May 11.
Colao said the European Commission had no choice but to block the merger because O2 and Three respectively have network mast-sharing agreements with Vodafone and market leader BT's EE.
But he said the ruling left open the possibility of the market consolidating in some other way.
"My prediction is that there will be commercial alliances, possibly new deals, but it's very hard to see now who with whom," he said.
However, Colao said Vodafone could compete in any circumstances as mobile and fixed line markets converge, including if cable group Liberty Global bought O2 or Three, as long as it could secure cheaper and more reliable access to former monopoly BT's fixed-line network.
In February regulator Ofcom said BT must give rivals greater access to its infrastructure to help improve high speed broadband coverage and must meet tougher targets on fixing faults in order to avoid the enforced separation of its Openreach local access network.
"To me the role of the regulator is to create the conditions where 'make' versus 'buy' is a free choice, it's not a mandated choice," he said. "But then if an (acquisition) opportunity comes then we will look at it."
NETWORK UPGRADE
Vodafone has spent 19 billion pounds ($27.5 billion) on Project Spring, a programme that has brought 4G speeds to 87 percent of its European footprint, built more fixed-line fibre and extended 3G coverage in emerging markets such as India.
Colao said the group had 47 million customers on faster 4G networks across 21 countries, and on average they were using twice as much data as they were on 3G networks.
"Price is coming down, but people are spending more," he said. "It's a win-win for consumers and for the company."
Vodafone reported earnings before interest, tax, depreciation and amortization of 11.6 billion pounds for the year to end-March, slightly shy of forecasts but up 2.7 percent and said it expected this rate to accelerate to 3-6 percent this year.
"I am confident we will sustain our positive momentum in the coming year, allowing us to maintain attractive returns for our shareholders," Colao said.
Capital expenditure will fall after the end of Project Spring, but not as much as had been forecast, to the mid-teens as a percentage of revenue rather than 13-14 percent.
Shares in Vodafone, which have fallen 2 percent in the last 12 months against a 11 percent decline for the European sector, closed up 1.5 percent at 227 pence.
Analysts at Citi said Vodafone's improving core earnings momentum should be met positively, although the raised capex outlook, and its likely impact on free cash flow and dividends would offset that.
Vodafone reported full-year revenue of 41 billion pounds, up 2.3 percent on an underlying basis. It raised its final dividend by 2.0 percent to 7.77 pence.
($1 = 0.6909 pounds)
(Editing by Louise Heavens, Greg Mahlich)