By Kate Holton
LONDON (Reuters) - Vodafone said next year's earnings would be hit by vital investment in its network, as it reported a 6.6 billion-pound dent to its 2014 results from writing down the value of European operations struggling in a tough market.
The world's second-largest mobile operator has reported record falls in underlying revenue in the last 18 months, due to fierce competition, regulator-imposed price cuts and European consumers reducing the number of calls they make to save money.
The weak results, which sent its shares down 3.8 percent on Tuesday, mirrored those of rivals Telefonica, Deutsche Telekom and Orange which have all reported lower profits due to competition and the need to rebuild.
Vodafone has taken the lead on improving its network, earmarking billions for investment in Europe and across its emerging market operations in a bid to get ahead of its rivals, after selling its U.S. business in a $130 billion (77.33 billion pounds) deal.
It bought cable operators in Germany and Spain to increase the range of services it can sell - betting, like its rivals, on fibre-optic networks and packages of services combining mobile and fixed-line phone, high-speed internet and TV to attract customers and boost future growth.
It has also pinned its future on the sale of superfast fourth-generation mobile networks, or 4G, and said on Tuesday it had 4.7 million 4G customers across 14 countries. Europe has lagged other regions, like the United States, in rolling out 4G. Verizon, Vodafone's former U.S. partner, had 26.3 million 4G subscribers by the end of the first quarter.
In the meantime Vodafone has been hit particularly hard in Germany, Italy and other European markets and said on Tuesday it had been forced to write down the value of its assets across Europe due to lower projected cash flows.
"Vodafone continues to spin the plates with mixed success," Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said.
"The writedowns across several European regions are further proof of the challenges the company is facing, with underlying profit continuing to move in the wrong direction."
Vodafone plans to invest around 19 billion pounds over the next two years, which includes the money assigned as part of its investment programme called Project Spring.
That will bring core earnings down to a range of 11.4 billion pounds to 11.9 billion pounds for 2015, from the 12.8 billion pounds it recorded in 2014 - itself down 7.4 percent. The forecast for 2015 was well below the average expectations of 12.5 billion pounds by analysts, according to Reuters data.
"Full year 2015 is an interesting one for Vodafone as the company makes substantial investments in order to make a clearer distinction between the quality of its network and the competition," Espirito Santo said in a note to clients.
"Should this be achieved, then alongside an improving macro environment Vodafone shares should benefit, however at this juncture, visibility of success is low and competitive forces remain substantial. We reiterate our Neutral recommendation."
Overall 2014 results were in line with forecasts and helped by an improvement in underlying trading in the fourth quarter. That was largely overlooked due to the weaker than expected earnings outlook however.
"Our operational performance has been mixed," Chief Executive Vittorio Colao said.
"The Group's emerging markets businesses have performed strongly throughout the year. In Europe, where we continue to face competitive, regulatory and macroeconomic pressures, we have taken steps to improve our commercial performance, particularly in Germany and Italy, and are beginning to see encouraging early signs."
Group organic service revenue for the fourth quarter fell by 3.8 percent, an improvement on the 4.8 percent drop recorded in the third quarter and the 4.9 percent fall in the second.
For the year, organic service revenue - which strips out items such as handset sales, currency movements and acquisitions - was down 4.3 percent, dragged lower by a 9.1 percent drop in Europe.
Shares in the group were down 4.4 percent to 207 pence by 1006 BST, making it the top faller on the FTSE 100 Index.
(editing by Sophie Walker)