By Paul Sandle
LONDON (Reuters) - Vodafone, the world's second-largest mobile operator, has raised its full-year earnings forecast for the first time in recent history, as customers switch to using more mobile data on their smartphones rather than looking for wifi.
The increase came as the company reported a 13 percent rise in first-half adjusted core earnings to 7.4 billion euros ($8.7 billion), comfortably ahead of market forecasts.
Vodafone is benefiting from growth in mobile data and higher take-up of its broadband services following heavy investment in both its mobile and fixed-line networks. It sees full-year earnings rising 10 percent, up from 4-8 percent previously.
"The strategy is working," Chief Executive Vittorio Colao said on Tuesday, adding Vodafone now covered almost 100 million homes with next-generation infrastructure in Europe.
The company added 1.2 million broadband homes in the first half, more than rivals Orange, Deutsche Telekom, BT and Telefonica, Colao said.
Faster networks, improved coverage and bigger data allowances helped to boost average revenue per user in its four biggest European markets.
"Customers are increasingly using mobile networks rather than wifi given the improving quality of our 4G and 4G-plus networks and our more generous data allowances," Colao said.
The usage of wifi versus cellular had declined for the first time, by around 4 percentage points, he said.
At 1545 GMT, Vodafone shares were up 5.2 percent, after touching a three month high of 228.45 pence.
INVESTING in CONVERGENCE
A growing trend among customers to take fixed-line broadband and mobile services from the same provider is also boosting growth for Vodafone, which is the biggest challenger to former monopoly providers in markets such as Germany.
"We see convergence, with true fibre with gigabit speeds, becoming more of a competitive case," Colao said. "Vodafone is investing in that area, (but) others are also investing."
It has recently announced a 2 billion euro investment in fibre connections in Germany and a partnership with CityFibre in Britain to improve its fixed-line position.
Analysts, however, speculate a broader tie up with cable firm Liberty Global, which has already combined with Vodafone in the Netherlands, would make sense.
Colao said the German investment did not preclude a possible deal with Liberty, which owns the Unitymedia cable network in the country.
"If an opportunity arises to do something with Liberty we will look at it," he reiterated. "(But) there's no reason for waiting and not doing the right thing because one day maybe something might happen."
UBS analysts, who rate the stock a "buy", said earnings were benefiting from solid top-line trends and cost savings.
"Almost every geography was notably ahead versus consensus for second-quarter organic service revenue growth, particularly Germany ... and Spain," they said.
Organic service revenue - which strips out the impact of acquisitions, disposals and currency moves - rose 1.7 percent in the six months to end-September, although the deconsolidation of Vodafone Netherlands and foreign exchange movements resulted in a 4.1 percent dip in total revenue to 23.1 billion euros.
Vodafone said its increased full-year forecast, which implies core earnings of 14.75-14.95 billion euros, reflected stronger-than-expected underlying revenue growth in Europe and a later-than-anticipated launch of a new entrant in Italy.
It said free cash flow would come in above 5 billion euros, rather than its previous view of around 5 billion euros.
Free cash flow was 1.3 billion euros in the half against a 100 million euro outflow a year ago when the company was battling fierce competition in India.
Vodafone agreed in January to combining its Indian unit with Idea Cellular to create a market leader to take on new entrant Reliance Jio Infocomm.
Vodafone said on Monday it would sell its mobile phone masts in India, owned separately from its Indus Towers joint venture, to American Tower Corp.
Colao said he was continuing to explore options for its 42 percent stake in Indus Towers.
($1 = 0.8559 euros)
(Editing by Louise Heavens and Mark Potter)