Vodafone hit by weakness in Italy and Spain Expansive growth in India and Turkey has failed to offset continuing weakness in Italy and Spain, as Europe's economic woes dragged down third-quarter revenues at Vodafone. Stronger data revenues, driven by the growing popularity of smartphones such as Apple's iPhone and Google's Android, could not compensate for "further deterioration" in Vodafone's southern European markets. Data revenues rose by 21.8 per cent compared with the third quarter in 2010, as European smartphone penetration rose from 16.5 per cent to 24.4 per cent year on year. "We are continuing to make progress in the key strategic areas of data, enterprise and emerging markets," said Vittorio Colao, Vodafone chief executive. Despite the further deterioration of the southern European economic environment during the quarter, our broad geographic mix is delivering a resilient overall performance. For the three months to December 31, Vodafone reported group revenue of £11.6bn, down by 2.3 per cent on the same period in 2010, weighed down by cuts to mobile termination rates. European revenues declined by 3.1 per cent to £7.4bn, weighed down by a 5.4 per cent year-on-year fall in Italy's service revenues - which exclude handset sales - while the group's troubles in Spain continued, with service revenues down 9.3 per cent. Mr Colao blamed the group's Italian weakness on "consumer confidence rather than pricing" and a "squeeze on disposable income," but reasserted that the country's economic troubles would not spiral down to the levels seen in Spain. "We feel that things are going in the right direction [in Italy] but it will be a prolonged process," Mr Colao said. On an underlying basis excluding currency fluctuations and acquisitions, Vodafone's group service revenues rose by 0.9 per cent - a slowing from the 1.3 per cent reported in the previous quarter and less than analysts" expectations of 1.1 per cent growth. Service revenues at Vodafone's Africa, Middle East and Asia Pacific division shrunk by 1.5 per cent to £3.2bn, dragged down by a 5.5 per cent decline at Vodacom, the group's South African subsidiary. The group's Australian division also reported lower service revenues - down by 11 per cent - while Egypt shrank by 1.5 per cent as inbound roaming sales fell in line with the slump in tourism following the country's political troubles. However, these declines were partially offset by strong customer growth driving up sales by 6.3 per cent in India. In January, India's supreme court found in favour of Vodafone in a landmark case that had threatened to land the telecoms business with a $2.9bn tax bill following its $10.9bn acquisition of Hutchison Essar in 2007. Vodafone has spent more than $15bn to become India's third-largest mobile operator by subscribers, but has increasingly seen expansion plans mired in regulatory uncertainty and beset by ferocious competition. At Verizon Wireless, the leading US mobile operator in which Vodafone holds a 45 per cent stake, strong customer and data revenue growth pushed up service revenues by 6.8 per cent, while the UK rose by 0.6 per cent. The weakness in southern Europe did not discourage Vodafone to change its adjusted operating profit expectations of £11.4bn-£11.8bn for the full year to March 31, with free cash flow of £6bn-£6.5bn, excluding a £2.8bn dividend received from Verizon Wireless in January. Mark James at Liberum Capital said Vodafone's results "make sobering reading. Not because they're much of a surprise ... more because one has to pause to reflect on the fact that revenues, profits and free cash flow are all moving in the wrong direction (albeit at a slower rate than peers). Our view remains that Vodafone is the best of a bad bunch. Earlier this week, the mobile phone operator moved to abandon attempts to merge its Greek business with rival Wind Hellas, as regulators raised concerns about a precedent being set by allowing a duopoly in a European market. Vodafone, which took a £450m impairment loss on its Greek unit last year, is the second-largest operator in Greece ahead of Wind, but both are about half the size of Cosmote, the state-backed market leader. Vodafone shares fell by 1.35p, or 0.8 per cent, to 172¼p in early London trading.