By Kate Holton
LONDON (Reuters) - Trading at Vodafone worsened in the third quarter as customers in previously robust northern Europe joined those in the south by cutting back from using their phones, adding impetus to the British group's efforts to cut costs.
A worse than expected 2.6 percent drop in organic service revenue in the three months to December 31 marked an acceleration from the 1.4 percent fall recorded in the second quarter and showed the intense pressure on the British group.
Shares in Vodafone rose 2 percent however as the group maintained its outlook for the year and as analysts said the results were not quite as bad as some had feared.
They also took strength from the statement that earnings margins should show an improving trend as the group continues with cost restructuring and savings programmes.
Telecoms firms across Europe are struggling with the macroeconomic pressures at a time when they need to build networks that offer faster speeds for consumers increasingly accessing the internet on mobile devices. They are also facing regulatory changes across the region and fierce competition.
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"We expect peer results to show that Vodafone is doing worse than peers," Bernstein analyst Robin Bienenstock said. "The pace of decline almost doubled in Europe while (emerging market) growth fell by about a third.
"They also confirmed improving margins in the second half too (after restructuring costs which will likely be monumental)."
Of Vodafone's 403 million customers, those in Britain and Germany cut back on usage to stick within their price plans while fewer customers signed up to the Vodafone network.
Within such a difficult environment, Telefonica's O2 turned more competitive in Britain and Deutsche Telekom's T-Mobile upped the pressure in Germany by offering cheaper deals for smartphone contracts and more minutes in price plans.
The worsening picture in Germany and Britain compounded the ongoing problems faced by all operators in the big southern European markets of Spain and Italy where customers have cancelled contracts altogether.
Germany was also hit by regulatory cuts due to changes in the amount operators can charge each other for connecting and disconnecting calls, intended to lower costs to consumers.
The group has also faced slowing growth in its emerging markets such as India.
"Our results continue to reflect very difficult market conditions in Europe," Colao said. "We are addressing this through firm actions on cost efficiency, and continuing to invest in areas of growth potential."
The group is considering cutting its workforce in Spain by up to a quarter as it fights an escalating price war in a shrinking market.
It kept its outlook unchanged for free cash flow for the year, after it nudged it lower at the first half results in November.
Dutch telecoms group KPN on Tuesday announced plans for a 4-billion-euro rights issue, in part because it paid more than expected for a 4G mobile licence.
On Wednesday Belgian's mobile phone operator Mobistar warned that it would miss 2013 earnings forecasts and cut its dividend due to cut-throat competition.
Citigroup sees telecom revenue falling 3.1 percent in 2013 after a 0.7 percent decline in 2012, with operating profits down 3.7 percent after a 3.8 percent fall in 2012.
(Reporting by Kate Holton; Editing by Paul Sandle and Hans-Juergen Peters)