Vodafone, the world's largest mobile operator by revenue, surprised investors with an upbeat outlook for 2012 on Tuesday after posting resilient results driven by customers upgrading to smartphones.

Analysts had expected the British firm to be more cautious after recent weak updates from rivals, but instead Vodafone said it was gaining or holding market share in most of its major markets and leading the switch to higher tariff smartphones.

Revenues and adjusted operating profits were both up over 3 percent for the full year and free cash flow was comfortably ahead of forecasts, sending shares in the group up 2 percent to outperform a slightly firmer FTSE 100 Index.

Vodafone's historic performance as a serial under-performer versus peers appears to be a thing of the past, said Bernstein analyst Robin Bienenstock, adding that it was now outperforming competitors in practically every major market in Europe.

Vodafone Chief Executive Vittorio Colao told reporters the group was benefiting from its early move into data revenues generated from Internet access and the development of integrated and tiered pricing plans.

He said the group was also expected to improve further as customers increasingly based their choice of operator on the quality of the network.

Continuing network investment is an important differentiator for Vodafone, improving the customer experience and giving us leadership in smartphone penetration and in customer take up of data plans, he said.

We enter the new financial year well positioned.

WEAKER RIVALS

Financial results for 2010/22 were boosted by a strong performance in the key emerging markets of India and South Africa and resilient trading in northern Europe such as Britain and Germany which offset weakness in Spain and Italy.

Vodafone reiterated its financial targets for 2012, which a few analysts had started to question after Dutch firm KPN and Belgium's Belgacom cut their outlooks due to weak domestic demand and intense competition.

Shares in Vodafone had fallen almost 6 percent since April 20, the day before KPN cut its forecast and warned about the state of the market.

Telefonica also reported tough trading in Spain, Deutsche Telekom showed weakness in Greece and regulatory pain in its domestic market and France Telecom showed intensifying competition in France.

Market fears following the Belgacom and KPN warnings were exaggerated, as we expected, Morgan Stanley said in a note. What is true is that southern Europe remains constrained by austerity, but that is not the same as a secular change.

The group recorded an impairment charge of 6.1 billion pounds ($9.9 billion) due to businesses in Spain, Greece, Portugal, Italy and Ireland, and recorded a net income of 5.3 billion pounds due to disposals and a tax settlement.

Vodafone core earnings were in line with forecasts, down 0.4 percent, but free cash flow was at the top of the range at 7.05 billion pounds, compared with a forecast of 6.7 billion pounds.

The closely watched metric of service revenue, which covers ongoing offerings such as voice, data, texts and Internet access but not one-off costs like handsets, was also ahead of forecasts in the fourth quarter, up 2.5 percent on an organic basis and in line with third quarter growth.

European organic service revenue was down 0.4 percent during the year. India reported growth of 16.2 percent and Vodacom, which operates mostly in South Africa, the Democratic Republic of Congo and Tanzania, posted growth of 5.8 percent.

The group said it expected adjusted operating profit to be in the range of 11 billion pounds to 11.8 billion pounds for 2012, with free cash flow between 6 billion and 6.5 billion pounds, lower than 2011 due to disposals.

It said it would also work more closely with its U.S. joint venture partner Verizon in handling multinational corporate accounts, developing technology and in procurement.

(Additional reporting by Paul Sandle; Editing by Hans Peters)

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