Vodafone Group (VOD), the UK phone operator, posted a 35% decline in first-half profit and lowered its full-year sales target amid a challenging market in Europe and competitive and regulatory pressures.

Despite the results and outlook, Vodafone did raise its free cash flow outlook for the year and announced plans to cut costs, which drove the stock higher.

For the six months ended September 30, Vodafone reported net income of 2.14 billion pounds ($3.33 billion), or 4.02 pence a share. That compares to 3.29 billion pounds, or 6.19 pence a share, in the year-earlier six-month period. Excluding items, Vodafone posted first half earnings of 7.52 pence a share, higher than the Thomson Reuters consensus of 7 pence a share.

Sales for the first six months gained 17% to 19.9 billion pounds.

For the full year, Vodafone is targeting sales of between 38.8 billion pounds and 39.7 billion pounds, lower than its past target of 39.8 billion pounds. The company did say it still expects to post adjusted operating profit between 11 billion pounds and 11.5 pounds. The company is targeting cutting costs by 1 billion pounds by 2011.

Vodafone upped its free cash flow target to between 5.2 billion pounds and 5.7 billion pounds, thanks to lower capital spending and tax payments.

Commenting on Vodafone’s cost cutting strategy, Chief Executive Vittorio Colao said in a press release that the strategy “reflects the changing economic and market conditions.” He said the company will focus on free cash flow. “We will improve operational performance through customer value enhancement and cost efficiency, supported by a 1 billion pound cost reduction programme. We will pursue growth opportunities in total communications, specifically mobile data, enterprise and broadband. In our emerging markets, the priority will be execution and we intend to further strengthen capital discipline,” said Colao.