By Kate Holton and Paul Sandle
LONDON (Reuters) - Britain's Vodafone said it was finally seeing early signs of a turnaround due to a growing number of customers and the take-up of more expensive 4G services, following yet another torrid quarter hit by fierce competition in Europe.
The world's second-largest mobile operator has reported record falls in underlying revenue in the last 18 months, due also to regulator-imposed price cuts and European consumers reducing the number of calls they made during the recession.
The firm, which is investing to improve network speed and coverage after selling its U.S. arm in a $130 billion deal, said organic service revenue - stripping out items such as handset sales, currency movements and acquisitions - was down 4.8 percent in the three months to the end of December.
That was in line with forecasts and followed a 4.9 percent drop in the previous quarter.
Chief Executive Vittorio Colao said, however, he thought the group could be nearing the bottom in terms of trading due to a number of green shoots on the horizon.
Those included an easing of the price cuts imposed by Brussels, an increasing demand by customers in emerging markets for Internet on their phones, and a revamp of its pricing which has drawn more customers to pre-paid contracts in key markets in Europe.
The company, second only to China Mobile globally in terms of subscribers and Britain's third-largest company by market capitalization, confirmed its full-year outlook.
Shares in the group were up 2.8 percent at 1108 GMT, making it the second-highest climber on the FTSE 100 Index, which was up 0.7 percent.
"Europe is still tough but there are a number of lead indicators," Finance Director Andy Halford told reporters, citing the increasing number of contract customers and the roll-out of the superfast 4G offering.
"When we put all of that together on Europe we're saying that over time we think that is going to be helpful in terms of the direction of travel on the revenue."
Thursday's trading update showed quarterly organic service revenue down 7.9 percent in Germany, down 5.1 percent in Britain and down 16.6 percent in Italy. Europe as a whole, which makes up two-thirds of revenue, was down 9.6 percent.
In its faster-growing emerging market division of Africa, Middle East and Asia Pacific (AMAP) it was up 5.5 percent.
In order to improve its offering, Colao said the group was in talks with several local content providers, which could mirror the deals it did in Britain where it offers a music service or sports clips with its faster 4G offering.
Vodafone described the pressures in Europe, where it competes with the likes of Telefonica, Orange and Deutsche Telekom, as intense.
That fits with the only other trading updates given so far for this quarter by the big telecom groups, with Nordic operator TeliaSonera and Dutch group KPN reporting weaker-than-expected quarterly profits.
With the U.S. arm sold, Vodafone's exposure to emerging markets has also increased. The British group is present in markets such as South Africa, Turkey and India, which have all been hit by falls in their currencies in recent weeks.
Colao said the recent turmoil in emerging markets had shown his cautious approach to expansion had been the right move, but that with mobile services remaining a basic need, he was confident in the future of those markets where they operate.
ADVERSE FX MOVES
Overall revenue on a reported basis in the AMAP region fell 6.0 percent, dragged down by a 12.5 percentage point impact from adverse foreign exchange rate movements, particularly with regard to the Indian rupee, the South African rand, the Turkish lira and the Australian dollar.
Despite the relentless pressures on the business in the core European markets and the uncertainty elsewhere, shares in Vodafone have rallied in the last year as it negotiated the sale of its 45 percent stake in U.S. operator Verizon Wireless.
With the deal due to complete at the end of February, Vodafone has itself been seen as a takeover target. But the most likely candidate AT&T was forced by the takeover panel to reveal its intentions, and said last week it had no plans to buy Vodafone in the next six months.
Vodafone shares have lost 7 percent since that announcement and hit their lowest since October on Wednesday. But sector bankers and analysts expect the U.S. group, which has spoken openly about its interest in Europe, to return at some point.
Analysts at Espirito Santo Investment Bank said Vodafone's European performance was slightly lower than expected, dragged down by a disappointing organic revenue growth in Germany, although the company was gaining traction in adding new customers in the country. Its emerging market result, however, was slightly better than consensus.
"We think Vodafone's Q3 report is therefore OK and perhaps the shares could see a relief rally today post KPN's poor Q4 and guidance earlier this week," they said.
(Editing by Pravin Char)