By Paul Sandle
LONDON (Reuters) - Vodafone, the world's second-largest mobile operator, raised its full-year earnings growth forecast to 10 percent on Tuesday as its customers used more mobile data on their smartphones rather than looking for wifi.
Chief Executive Vittorio Colao lifted guidance for the first time in Vodafone's recent history after reporting a 13 percent rise in first-half adjusted core earnings to 7.4 billion euros (£6.6 billion), comfortably ahead of market forecasts.
Analysts said Vodafone was benefiting from a combination of investment in its mobile and fixed line networks and cost cutting.
"In our major 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, driven by network improvements and bigger data allowances.
"The anxiety or worry of finishing data is gradually going away," he added, referring to customers' concerns about using up data allowances in their monthly plans.
Vodafone is targeting an increased share of the broadband market, as it sees more customers take converged fixed-line and mobile products from a single providers.
It has recently announced a 2 billion euro investment in fibre connections in Germany and a strategic partnership with CityFibre in Britain to improve its fixed-line position.
Analysts, however, speculate that a broader tie up with cable firm Liberty Global, which has already combined with Vodafone in the Netherlands, would make sense.
Shares in Vodafone were trading up 5 percent at 1005 GMT, having earlier hit a three month high of 227.50 pence.
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 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.
(Editing by Louise Heavens and Mark Potter)