Vodafone Group Plc
14 November 2006
VODAFONE GROUP PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2006
PART I
Embargo: Not for publication before 07:00 hours 14 November 2006
VODAFONE ANNOUNCES RESULTS FOR
THE SIX MONTHS ENDED 30 SEPTEMBER 2006
PART I
Highlights(1):
* Group revenue of £15.6 billion, with organic growth of 4.1%
* Profit before taxation for the period increased to £4.8 billion before
impairment charges of £8.1 billion. Loss before taxation was £3.3 billion
* Adjusted basic earnings per share increased by 17.7% to 5.98 pence,
including the benefit from an interim adjusted effective tax rate of 29.2%.
Basic loss per share from continuing operations of 8.02 pence
* Free cash flow from continuing operations of £3.0 billion and net cash
inflow from operating activities from continuing operations of £4.8 billion,
after net taxation paid of £1.2 billion
* Interim dividend per share increased by 6.8%, to 2.35 pence, giving a
pay out of £1.2 billion
Outlook summary(2):
* No change to the full year organic proportionate mobile revenue growth
range of 5% to 6.5% and proportionate organic mobile EBITDA margin
expectations of around 1 percentage point lower than last year
* Free cash flow from continuing operations outlook increased to an
expected range of £4.7 billion to £5.2 billion due to the delayed settlement
of certain long-standing tax issues
* Capitalised fixed asset additions outlook unchanged with a range of £4.2
billion to £4.6 billion
* Full year adjusted effective tax rate expected to be lower than
previously indicated at around 30%. Longer term percentage rate now
expected to be in the low 30's
(1) See page 4 for Group Financial and Operating Highlights, page 40 for
use of non-GAAP financial information and page 41 for definition of terms
(2) See page 39 for a cautionary statement on Forward-Looking Statements
Arun Sarin, Chief Executive, commented:
'These results show that Vodafone is on track to deliver on its key targets for
the current financial year. Competitive and regulatory pressures in the European
region have been offset by strong performances in our developing markets and the
United States. We have also made good progress since May in the execution of our
new strategy and the response to our new products and services has been very
encouraging.'
CHIEF EXECUTIVE'S STATEMENT
Vodafone has announced first half results showing progress in very competitive
markets. Despite the pressures from competition and regulation, we continue
to execute the strategy laid out to shareholders in May and are on track to
meet our full year targets.
We have a unique franchise of international customers, with over 191 million
proportionate mobile customers, of whom 147 million are in controlled or jointly
controlled entities.
Proportionate mobile revenue for the first half of this financial year increased
by 6% on an organic basis. The Europe region remains very competitive with flat
organic growth year on year. Of our four principal markets, Germany, Italy and
the UK saw declining total revenue after taking into account the impact of
termination rate cuts, whilst Spain continued its strong progress, posting
another period of double digit top line growth. Our high growth markets in the
EMAPA region continued to perform well, growing organically at 13.7% year on
year. Together with the US, where Verizon Wireless revenue grew 18.2% year on
year in local currency, this strong performance helped to offset the lower
growth in our more established markets.
Proportionate mobile EBITDA margins on an organic basis were only slightly
lower year on year, though the mobile EBITDA margin is expected to fall by a
larger amount year on year in the second half of the 2007 financial year.
Free cash flow from continuing operations was slightly lower at £3.0 billion in
the first half of the financial year; a 6.9% increase in operating free cash
flow was offset by higher tax payments of £1.2 billion.
Higher interest rates, along with pricing and continued regulatory pressures
in the German market, led to an impairment charge of £8.1 billion in the total
carrying value of goodwill in respect of our German and Italian operations.
In May this year, we announced five core strategic goals to drive forwards the
financial and operating results of the Company:
Revenue stimulation and cost reduction in Europe
In our mature European markets, we are fighting the twin pressures of price
erosion and regulation. The core strategy in this region is to stimulate revenue
and cut costs.
Average monthly voice usage per customer in Europe is still below 150 minutes.
Central to stimulating revenue is driving fixed to mobile substitution with
larger minute bundles and innovative tariffs, prepaid to contract migrations and
targeted promotions. In Germany and the UK, new larger and better value bundles
have been launched, maintaining competitiveness in the respective marketplaces.
In Italy, revenue declines appear to be stabilising following a successful
summer promotion. We are targeting fixed to mobile substitution through
Vodafone At Home and similar offerings in Germany, Italy, the UK, Greece,
Hungary and Portugal. Expansion of this offering will occur, with a further
three countries expected to launch by the end of the current financial year.
Building on our success in business, we continue to deliver leading edge
services, such as Oficina Vodafone in Spain and applications using the benefits
of mobile broadband following the introduction of HSDPA.
Progress has also been made on core cost reduction programmes which will
demonstrate benefits over time. In outsourcing, we have chosen EDS and IBM to
manage application development and maintenance services in a global IT
outsourcing deal, which is expected to deliver 25% to 30% unit cost savings
within three to five years. We continue to look at the cost of owning and
maintaining networks, with recent announcements including 2G and 3G network
sharing in Spain and entering into discussions on network sharing in the Czech
Republic. We have also announced quicker than expected progress on data centre
consolidation in Europe, where we expect to save costs of around 25% to 30% in
two to three years.
Deliver strong growth in emerging markets
Our focus in emerging markets is to build on our strong track record of creating
value, having delivered strong performances over time in markets such as Egypt
and South Africa. This has continued in the first half of this financial year,
with organic service revenue growth of 40.2% in Egypt and 20.8% in South Africa.
Our more recent acquisitions are performing very well, with first half year on
year organic service revenue growth of 31.3% in Romania and 14.4% in the Czech
Republic. In Turkey, we are very pleased with progress and the company is
performing well ahead of its acquisition business plan. In India, organic
revenue growth was greater than 50%. All of these performances are ahead of our
expectations at the time of each acquisition.
Innovate and deliver on our customers' total communications needs
As customer needs are evolving, we are providing a sub-segment of our customer
base with fixed broadband connectivity as part of a total telecommunications
solution. This type of service will typically be provided using wholesale
relationships with infrastructure providers and we have announced deals with BT
in the UK, Fastweb in Italy and Arcor in Germany.
We are continuing to develop a mobile advertising revenue stream and in this
respect we have announced today our intent to partner with Yahoo! in the UK. We
are also developing products and services which will integrate the mobile and PC
environments.
We will continue to pursue a mobile centric approach, focusing on the core
benefits to customers of mobility and personalisation, and will resell fixed
line technologies only according to customer needs.
Actively manage our portfolio to maximise returns
Vodafone will seek to invest only where we can generate superior returns for our
shareholders in markets that offer a strong local position, with focus a on
specific regions.
In keeping with this strategy, in the first half of the financial year we closed
the sale of Vodafone Japan and recently completed the sale of our 25% stake in
Proximus in Belgium for cash proceeds of €2 billion. For Proximus, this
represented a good exit price with an enterprise value of 7.2 times forecast
EBITDA for the current financial year. Most recently, we announced the
proposed acquisition of up to a further 4.9% of Vodafone Egypt, increasing
our exposure to this high growth market. We will continually review the
countries in which we operate going forward.
Align capital structure and shareholder returns policy to strategy
In May this year, we outlined a new capital structure and returns policy
commensurate with the operational strategy of the business. As a result, we are
now targeting a low single A credit rating.
The Board also announced a targeted annual 60% payout of adjusted earnings per
share in the form of dividends. We are announcing an interim dividend of 2.35
pence, up by 6.8% when compared to last year.
Having returned over £19 billion to shareholders, excluding dividends, in the
last two financial years, we have no current plans for further share purchases
or other one-off returns.
Prospects for the current year
Revenue progression remains in line with expectations and the Group continues to
expect organic growth in proportionate mobile revenue to be in the range of 5%
to 6.5% and proportionate mobile EBITDA margins to be around 1 percentage point
lower than the 2006 financial year on an organic basis.
Free cash flow from continuing operations on an underlying basis is still
expected to be in the range of £5.2 billion to £5.7 billion. As a result of a
delay in the settlement of certain items, payments in respect of long standing
tax issues are expected to be around £0.5 billion for this financial year,
leading to an expected range of £4.7 billion to £5.2 billion for reported free
cash flow from continuing operations.
Summary
We are successfully executing a clear five point strategy to provide long term
value creation for our shareholders. The financial results for the first six
months highlight that we are on track to deliver on our key full year targets.
We will continue to deliver real value to customers that will enable us to
achieve our targets in the face of tough competition and regulatory pressures.
Arun Sarin
GROUP FINANCIAL AND OPERATING HIGHLIGHTS
-----------------------------------------------------------------------------------------
2006 2005 Change %
-------------------
Continuing operations(1)(2): Page £m £m Reported Organic
Financial information
Revenue 21 15,594 14,548 7.2 4.1
Operating (loss)/profit 21 (2,952) 4,286
(Loss)/profit before taxation 21 (3,330) 3,911
(Loss)/profit for the period 21 (4,548) 2,629
Basic (loss)/earnings per share (pence) 21 (8.02)p 4.07p
Capitalised fixed asset additions 1,824 1,750 4.2
Net cash flow from operating activities 19 4,840 5,227 (7.4)
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Performance reporting(3)
Group EBITDA 7 6,242 5,907 5.7 2.8
Adjusted operating profit 7 5,141 4,782 7.5 7.4
Adjusted profit before tax 17 4,724 4,558 3.6
Adjusted effective tax rate 17 29.2% 31.5%
Adjusted profit for the period
attributable to equity shareholders 29 3,441 3,237 6.3
Adjusted basic earnings per share (pence) 29 5.98p 5.08p 17.7
Free cash flow 19 2,955 3,252 (9.1)
Net debt at 30 September 19 20,229 13,421 50.7
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
2006 2005 Change %
------------------
Continuing operations(1)(2): Page Million Million Reported Organic
Operational(4)(5)
Vodafone live! - Closing active devices 44 30.7 22.2 38.3
Closing 3G registered devices 44 10.9 3.3 230.3
Closing Vodafone Mobile Connect data cards 1.0 0.6 66.7
Mobile voice usage (minutes) 48 112,649 84,077 34.0 18.2
-----------------------------------------------------------------------------------------
The interim results have been prepared in accordance with International
Financial Reporting Standards ('IFRS') (including International Accounting
Standards ('IAS') and interpretations issued by the International Accounting
Standards Board ('IASB') and its committees, and as interpreted by any
regulatory bodies applicable to the Group) and adopted for use in the European
Union ('EU').
This interim results announcement contains certain information on the Group's
results and cash flows that have been derived from amounts calculated in
accordance with IFRS but are not themselves IFRS measures. They should not be
viewed in isolation as alternatives to the equivalent IFRS measure and should be
read in conjunction with the equivalent IFRS measure. Further disclosures are
provided under 'Use of Non-GAAP Financial Information' on page 40.
See page 41 for definition of terms
(1) Excluding the results of discontinued operations. See note 9 to the interim
consolidated financial statements
(2) Amounts presented as at 30 September or for the six months then ended
(3) These measures are stated excluding impairment losses, non-recurring
amounts related to business acquisitions and disposals, changes in the fair
value of equity put rights and similar arrangements and net foreign
exchange gains and losses on certain financial instruments and
intercompany borrowings
(4) Cumulative number as at 30 September
(5) Figures represent 100% of subsidiary information and a pro-rata share in
joint ventures
GROUP PROPORTIONATE INFORMATION
2006 2005 Change %
--------------------
£m £m £ Organic
--------------------------------------------------------------------------------
Financial Information
Revenue
Europe
- Germany 2,827 2,913 (3.0)
- Italy 2,174 2,240 (2.9)
- Spain 2,268 1,968 15.2
- UK 2,549 2,568 (0.7)
- Other Europe 2,230 2,457 (9.2)
Less: revenue between Europe operations (218) (197)
------ ------
11,830 11,949 (1.0) 0.6
------ ------
EMAPA
- Subsidiaries and joint ventures 2,867 1,865 53.7
- Associated undertakings and
investments 6,712 6,092 10.2
Less: revenue between EMAPA operations (6) (5)
------ ------
9,573 7,952 20.4 13.7
------ ------
Other(1) 606 528 14.8
Eliminations (112) (114)
------ ------
Group - Continuing operations 21,897 20,315 7.8 6.2
====== ======
Mobile operations - Continuing operations 21,263 19,798 7.4 6.0
EBITDA
Europe
- Germany 1,263 1,353 (6.7)
- Italy 1,128 1,207 (6.5)
- Spain 813 721 12.8
- UK 785 781 0.5
- Other Europe 819 849 (3.5)
------ ------
4,808 4,911 (2.1) (1.6)
------ ------
EMAPA
- Subsidiaries and joint ventures 988 657 50.4
- Associated undertakings and investments 2,689 2,344 14.7
------ ------
3,677 3,001 22.5 17.5
------ ------
Other(1) 301 243 23.9
------ ------
Group - Continuing operations 8,786 8,155 7.7 6.2
====== ======
Mobile operations - Continuing operations 8,656 8,090 7.0 5.6
====== ======
Percentage Percentage
EBITDA margin Points Points
Europe
- Germany 44.7% 46.4% (1.7)
- Italy 51.9% 53.9% (2.0)
- Spain 35.8% 36.6% (0.8)
- UK 30.8% 30.4% 0.4
- Other Europe 36.7% 34.6% 2.1
------ ------
40.6% 41.1% (0.5)
------ ------
EMAPA
- Subsidiaries and joint ventures 34.5% 35.2% (0.7)
- Associated undertakings and investments 40.1% 38.5% 1.6
------ ------
38.4% 37.7% 0.7
------ ------
Group EBITDA margin - Continuing
operations 40.1% 40.1% - -
Mobile EBITDA margin - Continuing
operations 40.7% 40.9% (0.2) (0.1)
(1) Other operations include the Group's fixed line operator in Germany, Arcor,
and common functions which represent revenue from Partner Markets and
unallocated central Group income and expenses
Proportionate information is presented and calculated on the basis described on
page 37. See page 41 for definition of terms
--------------------------------------
2006 2005 Change %
-------------------
Million Million Reported Organic
Mobile customers
Net proportionate customer additions(1) 12.0 10.1 18.8
Proportionate customers at 30 September 191.6 156.3 22.6 13.9
--------------------------------------
(1) Excludes additions from acquisitions and stake changes and the impact of a
change in the application of the disconnection policy. Further analysis is
provided on page 43
Customers are presented for continuing operations. See page 41 for definition of
terms
OUTLOOK
Please see 'Forward-Looking Statements' on page 39, 'Use of non-GAAP financial
information' on page 40 and definition of terms on page 41.
2007 financial year
Outlook
------------------------------------------------ ---------------------------
Organic proportionate mobile revenue growth(1) 5% to 6.5%
Organic proportionate mobile
EBITDA margin(1) Around 1 percentage
point lower than
2006 financial year
Free cash flow from continuing operations* £4.7 to £5.2 billion
Capitalised fixed asset additions £4.2 to £4.6 billion
Adjusted effective tax rate(2) Around 30%
------------------------------------------------ ---------------------------
* Stated after an estimated £0.5 billion of tax payments, including associated
interest, in respect of a number of long standing tax issues
(1) Assumes constant exchange rates and excludes the impact of business
acquisitions and disposals for the financial measures and adjusted to
reflect like-for-like ownership levels in both years
(2) See page 17 for adjusted effective tax rate calculation
For the year ending 31 March 2007 ('2007 financial year')
The Group continues to expect organic growth in proportionate mobile revenue to
be in the range of 5% to 6.5%.
Proportionate mobile EBITDA margin is also still expected to be around 1
percentage point lower than the year ending 31 March 2006 ('2006 financial
year') on an organic basis, excluding the impact of any one-off business
restructuring costs.
In line with the outlook provided on 30 May 2006, proportionate mobile EBITDA
margin is expected to fall by a larger amount year on year for the second half
of the 2007 financial year than for the first half of the 2007 financial year.
This is primarily as a result of the timing of commercial initiatives, including
pricing changes, in Europe and in particular in Germany and the UK.
The Group expects capitalised fixed asset additions to still be in the range of
£4.2 billion to £4.6 billion, which is higher than the 2006 financial year due
to the effect of recently completed acquisitions and disposals and the Group's
rollout of HSDPA.
Free cash flow from continuing operations is still anticipated to be in the
range of £5.2 billion to £5.7 billion before tax payments and associated
interest in respect of the potential settlement of a number of long standing tax
issues. Due to a delay in the settlement of some of these issues, tax payments
and associated interest in the current financial year are now expected to be
approximately £0.5 billion, giving an expected range of £4.7 billion to £5.2
billion for reported free cash flow from continuing operations. The Group still
expects significant cash tax and associated interest payments over the next few
years in respect of these long standing issues, although certain settlements may
be later than previously anticipated.
The effective tax rate for the year is expected to be similar to the 2006
financial year at around 30%, slightly higher than in the first half of the
financial year due to the net benefit of one-off items recorded in full in the
first half. The Group now expects its longer term effective tax rate percentage
to be in the low 30's, having previously anticipated this in the mid 30's.
The Group continues to maintain its existing provision in respect of the ongoing
enquiry by HM Revenue & Customs with regard to the application of the UK
Controlled Foreign Company ('CFC') legislation to the Group, as described in the
Group's Annual Report for the year ended 31 March 2006. A recent judgment in a
similar case in the European Court of Justice has provided guidance to the UK
courts and whilst it may be some time before the enquiry is finally resolved,
the Group has not made any additional provision.
For the year ending 31 March 2008 ('2008 financial year')
In order to simplify its financial reporting and improve understanding of its
results, the Group will be moving to a single basis of statutory reporting and
will no longer provide proportionate financial information with effect from the
2008 financial year. The Group's outlook statement will also change to reflect
only statutory financial measures. The full outlook for the 2008 financial year
will be provided with the preliminary results of the 2007 financial year in May
2007.
Revenue stimulation and cost reduction
The Group continues to anticipate delivering benefits through its One Vodafone
initiatives equivalent to at least 1% additional revenue market share in the
2008 financial year compared with the 2005 financial year, which the Group is
measuring in Germany, Italy, Spain and the UK against its principal competitors.
Capitalised fixed asset additions are expected to be 10% of revenue in the 2008
financial year for the total of the Group's Europe region and common functions,
which will require reducing expenditure in that year by approximately £400
million to £500 million when compared with the 2006 financial year.
Assuming no significant changes in exchange rates and after adjusting for
acquisitions and disposals, the Group expects operating expenses to be broadly
stable in the 2008 financial year when compared with the 2006 financial year for
the total of its Europe region and common functions, excluding the potential
impact from developing and delivering new services and from any business
restructuring costs.
BUSINESS REVIEW
In April 2006, the Group announced changes to the organisational structure of
its operations, effective from 1 May 2006. The following results are presented
for continuing operations in accordance with the new organisation structure.
Europe includes the results of the Group's mobile operations in Western Europe,
while EMAPA includes the Group's operations in Eastern Europe, the Middle East,
Africa, Asia and the Pacific area and the Group's associates. Other operations
comprise the Group's common functions and its fixed line business in Germany.
----------------------------------------------------------------------------------------------
Europe EMAPA Other Eliminations 2006 2005 % change
-------------
£m £m £m £m £m £m £ Organic
Voice revenue 9,006 2,436 - (72) 11,370 10,771 5.6 2.4
Messaging revenue 1,458 331 - (3) 1,786 1,613 10.7 6.3
Data revenue 603 56 - (9) 650 504 29.0 30.0
Fixed line and DSL
revenue - 34 706 (14) 726 603 20.4 14.0
------------------------------------------------------
Total service revenue 11,067 2,857 706 (98) 14,532 13,491 7.7 4.4
Acquisition revenue 457 176 - - 633 603 5.0
Retention revenue 174 8 - - 182 202 (9.9)
Other revenue 132 34 86 (5) 247 252 (2.0)
------------------------------------------------------
Total revenue 11,830 3,075 792 (103) 15,594 14,548 7.2 4.1
Interconnect costs (1,760) (520) (172) 98 (2,354) (2,256) 4.3 1.8
Other direct costs (780) (353) (121) 5 (1,249) (1,032) 21.0 10.5
Acquisition costs (1,158) (313) (40) - (1,511) (1,418) 6.6 4.5
Retention costs (763) (91) (43) - (897) (924) (2.9) (2.1)
Operating expenses (2,561) (698) (82) - (3,341) (3,011) 11.0 8.1
------------------------------------------------------
EBITDA 4,808 1,100 334 - 6,242 5,907 5.7 2.8
Acquired intangibles
amortisation (8) (189) - - (197) (52)278.8
Purchased licence
amortisation (443) (24) - - (467) (471) (0.8)
Depreciation and other
amortisation (1,365) (364) (115) - (1,844) (1,773) 4.0
Share of result in
associates 2 1,405 - - 1,407 1,171 20.2 23.6
------------------------------------------------------
Adjusted operating
profit 2,994 1,928 219 - 5,141 4,782 7.5 7.4
Adjustments for:
- Impairment losses (8,100) - - - (8,100) (515)
- Other - - 1 - 1 -
- Non-operating income
of associates - 6 - - 6 19
------------------------------------------------------
Operating (loss)/profit (5,106) 1,934 220 - (2,952) 4,286
======================================================
GROUP RESULTS
Revenue increased by 7.2% to £15,594 million for the six months ended 30
September 2006, resulting from organic growth of 4.1% and the impact from the
acquisitions in the Czech Republic, Turkey and India, the stake increases in
Romania and South Africa and the disposal of the Group's operations in Sweden of
3.4%, partially offset by the impact of unfavourable movements in exchange rates
of 0.3%.
The EMAPA region accounted for more than 70% of the organic growth in revenue,
with the Europe region and other operations also growing organically, whilst the
EMAPA region accounted for all the growth in reported revenue.
Adjusted operating profit increased by 7.5% to £5,141 million, with organic
growth of 7.4%. The EMAPA region achieved organic growth of 26.1%, partially
offset by a decline in profitability in the Europe region due to the challenges
of increased competition, high penetration and termination rate cuts.
Unfavourable exchange rate movements reduced reported growth for the Group by
0.5%, whilst the net impact of acquisition and disposal activity and the
classification of the Group's associated undertaking in Belgium as held for sale
following announcement on 25 August 2006 of the agreement to sell the Group's
25% interest in Proximus to Belgacom, improved reported growth by 0.6%.
The Group recorded an impairment charge of £8,100 million in relation to the
carrying value of goodwill in the Group's operations in Germany (£6,700 million)
and Italy (£1,400 million) following an increase in long term interest rates,
along with increased price competition and continued regulatory pressures in
the German market. The increase in long term interest rates, which led to higher
discount rates, resulted in a reduction in value of £3,700 million. The
impairment charge was the primary reason for the operating loss of
£2,952 million for the current period compared with an operating profit of
£4,286 million for the six months to 30 September 2005.
EUROPE
Germany Italy Spain UK Other Eliminations Europe % change
--------------
£m £m £m £m £m £m £m £ Organic
Six months ended
30 September 2006
Voice revenue 2,114 1,732 1,738 1,846 1,743 (167) 9,006 (2.4) (0.7)
Messaging revenue 386 275 190 365 256 (14) 1,458 2.9 3.7
Data revenue 190 89 122 134 91 (23) 603 27.2 29.1
--------------------------------------------------------
Total service revenue 2,690 2,096 2,050 2,345 2,090 (204) 11,067 (0.4) 1.1
Acquisition revenue 71 57 153 120 56 - 457 (5.6)
Retention revenue 17 20 62 29 46 - 174 (12.1)
Other revenue 49 1 3 55 24 - 132 (12.0)
--------------------------------------------------------
Total revenue 2,827 2,174 2,268 2,549 2,216 (204) 11,830 (1.0) 0.6
Interconnect costs (363) (326) (349) (489) (437) 204 (1,760) (3.1) (1.1)
Other direct costs (167) (111) (174) (209) (119) - (780) 5.0 6.4
Acquisition costs (274) (114) (323) (292) (155) - (1,158) (1.9) 0.6
Retention costs (182) (62) (183) (186) (150) - (763) (9.6) (7.7)
Operating expenses (578) (433) (426) (588) (536) - (2,561) 4.4 7.7
--------------------------------------------------------
EBITDA 1,263 1,128 813 785 819 - 4,808 (2.1) (1.6)
Acquired intangibles
amortisation - - - (4) (4) - (8) 166.7
Purchased licence
amortisation (172) (37) (34) (166) (34) - (443) -
Depreciation and
other amortisation (367) (252) (194) (297) (255) - (1,365) (4.6)
Share of result in
associates - - - - 2 - 2 (33.3)
--------------------------------------------------------
Adjusted operating
profit 724 839 585 318 528 - 2,994 (1.5) (2.7)
========================================================
EBITDA margin 44.7% 51.9% 35.8% 30.8% 37.0% 40.6%
Six months ended
30 September 2005
Voice revenue 2,225 1,816 1,546 1,864 1,923 (148) 9,226
Messaging revenue 408 262 162 334 253 (2) 1,417
Data revenue 128 81 89 119 84 (27) 474
--------------------------------------------------------
Total service revenue 2,761 2,159 1,797 2,317 2,260 (177) 11,117
Acquisition revenue 72 46 123 152 91 - 484
Retention revenue 31 30 47 31 59 - 198
Other revenue 49 5 1 68 27 - 150
--------------------------------------------------------
Total revenue 2,913 2,240 1,968 2,568 2,437 (177) 11,949
Interconnect costs (394) (366) (323) (438) (472) 177 (1,816)
Other direct costs (144) (122) (155) (180) (142) - (743)
Acquisition costs (251) (85) (246) (368) (231) - (1,181)
Retention costs (211) (71) (161) (230) (171) - (844)
Operating expenses (560) (389) (362) (571) (572) - (2,454)
--------------------------------------------------------
EBITDA 1,353 1,207 721 781 849 - 4,911
Acquired intangibles
amortisation - - - (2) (1) - (3)
Purchased licence
amortisation (171) (37) (34) (166) (33) - (441)
Depreciation and
other amortisation (407) (247) (158) (293) (326) - (1,431)
Share of result in
associates - - - - 3 - 3
--------------------------------------------------------
Adjusted operating
profit 775 923 529 320 492 - 3,039
========================================================
EBITDA margin 46.4% 53.9% 36.6% 30.4% 34.8% 41.1%
% % % % %
Change at constant
exchange rates
Voice revenue (5.4) (5.1) 11.9 (1.0) (9.8)
Messaging revenue (5.8) 4.8 16.6 9.3 0.4
Data revenue 48.4 8.3 36.2 12.6 8.3
----------------------------------
Total service revenue (3.0) (3.4) 13.5 1.2 (8.0)
Acquisition revenue (1.7) 22.5 24.4 (21.1) (39.6)
Retention revenue (46.4) (32.7) 29.9 (6.5) (22.0)
Other revenue 0.3 (85.1) - (19.1) (11.1)
----------------------------------
Total revenue (3.4) (3.4) 14.7 (0.7) (9.6)
Interconnect costs (8.4) (11.3) 7.6 11.6 (7.8)
Other direct costs 15.2 (9.3) 11.6 16.1 (16.2)
Acquisition costs 8.9 32.2 30.6 (20.7) (33.5)
Retention costs (14.3) (13.2) 13.2 (19.1) (12.8)
Operating expenses 2.8 10.9 16.9 3.0 (7.0)
----------------------------------
EBITDA (7.0) (7.0) 12.2 0.5 (4.0)
Acquired intangibles
amortisation - - - 100.0 -
Purchased licence
amortisation - - - - 300.0
Depreciation and
other amortisation (11.0) (1.7) 18.0 1.4 (22.5)
Share of result in
associates - - - - -
----------------------------------
Adjusted operating
profit (6.9) (9.3) 10.0 (0.6) 7.3
==================================
EBITDA margin
movement (1.7) (2.0) (0.8) 0.4 2.2
--------------------------------------------------------------------------------------
Germany Italy Spain UK Other Europe
KPIs
Closing customers ('000)
- 2006 29,622 19,337 14,024 16,287 16,257 95,527
- 2005 28,259 17,884 12,418 15,764 16,630 90,955
Average monthly ARPU
- 2006 €22.3 €27.3 €35.9 £24.1 £21.9
- 2005 €24.4 €30.1 €37.1 £24.9 £23.5
Annualised blended churn (%)
- 2006 21.4% 21.3% 28.9% 35.2% 26.3%
- 2005 18.5% 18.0% 21.2% 32.7% 23.7%
Closing 3G devices ('000)
- 2006 2,724 2,830 1,739 1,348 1,726 10,367
- 2005 815 1,044 315 438 695 3,307
Voice usage (millions of minutes)
- 2006 15,593 15,737 14,511 14,786 14,120 74,747
- 2005 12,784 14,337 11,507 13,747 13,927 66,302
See page 41 for definition of terms
--------------------------------------------------------------------------------------
The Europe region continues to be a challenging environment as a result of
intense competition from established mobile operators and new market entrants,
coupled with penetration rates exceeding 100% in many markets, and continuing
regulator-imposed rate reductions on incoming calls. The strategy for the region
is, therefore, to focus on stimulating additional voice and data usage in a way
that enhances customer value and revenue. This includes extending the current
mobile only offering by innovating and delivering total communications
solutions, whilst continuing to leverage regional scale to reduce the cost
structure.
Revenue
Total revenue fell slightly in the six months ended 30 September 2006,
consisting of a 0.6% growth on an organic basis and a 0.4% impact from
favourable exchange rate movements, offset by a 2.0% decline following the
disposal of the Group's operations in Sweden in January 2006. The organic growth
in total revenue arose from a 7.9% increase in the average customer base, driven
by competitively priced tariffs, successful promotions and innovative services,
partially offset by pressures on pricing and termination rate cuts. The
estimated impact of termination rate cuts and other non-recurring adjustments on
the growth in total revenue in the current period is as follows:
Estimated impact of
Total revenue termination rate
growth at cuts and other
constant adjustments(1) Underlying Underlying
exchange Impact of on total revenue total service
rates disposals growth revenue growth revenue growth
% % % % %
Germany (3.4) - 3.6 0.2 0.7
Italy (3.4) - 6.5 3.1 3.3
Spain 14.7 - 4.9 19.6 18.9
UK (0.7) - 0.3 (0.4) 1.6
Other Europe (9.6) 9.8 3.2 3.4 5.0
Europe - Total (1.4) 2.0 3.6 4.2 5.0
Note:
(1) Revenue for certain arrangements is now presented net of associated
direct costs
Service revenue increased by 1.1% on an organic basis due to growth in the
customer base, which was partially offset by a decline in ARPU. Reported growth
showed a slight decline, with strong growth in Spain and certain markets in
Other Europe offset by slight declines in Germany and Italy.
Competitive offerings have contributed to the growth in average customers in
Europe, with particularly strong rises in Spain and Greece, with the former also
benefiting from favourable mobile number portability results. A continuing focus
on customer retention has led to contract churn falling in many markets, whilst
prepaid churn has risen due to intensified competition from existing network
operators and new virtual network operators, as well as being influenced by
customer self-upgrades in a number of markets. In Spain and Other Europe, churn
has been impacted by certain one-off adjustments from a change in the
application of the Group's policy on customer disconnections. Excluding the
resulting one-off disconnections, blended churn would have been 20.3% and 24.5%
for Spain and Other Europe, respectively.
The service revenue growth in Spain resulted from the increase in the average
customer base, up 16.9% in the period, driven by successful promotions and
competitive tariffs, targeted at both the consumer and business segments. This
growth was complemented by a strong handset portfolio which has resulted in more
than 60% of gross additions joining as 3G customers, and led to a market leading
share of net additions in the first half of the financial year. In Other Europe,
service revenue growth was 2.1% excluding the impact of the disposal of Sweden,
mainly due to service revenue growth in Greece and Portugal of 4.0% and 5.1%
respectively, in local currency, primarily resulting from increases in
respective customer bases, offset by a small decline in the Netherlands,
principally from the impact of a termination rate cut. The decreases in service
revenue experienced in Germany and Italy were driven by termination rate cuts
and the impact of competition. The underlying trend was relatively stable in
Germany, whilst in Italy the trend improved when comparing year on year growth
in the second quarter of the period to the first quarter. Voice usage in Italy
benefited from a successful summer promotion for which 2.8 million customers
registered. The voice promotion allowed customers to make free voice calls to
other Vodafone customers for a monthly fee.
Both Germany and the UK recently announced tariff changes to maintain
competitiveness in their respective marketplaces. In Germany, larger and better
value bundles, which now include calls to customers of other mobile operators
and new flat rate plans with unlimited calls and text messages to other Vodafone
and fixed line customers, are now available. These tariff changes contributed to
the impairment loss in Germany in the period. In the UK, bigger bundles with
more choice are available for contract customers that allow them to add extra
minutes, extra texts or extra entertainment, without adding anything extra to
the cost of their bill.
Voice revenue
Demand stimulation initiatives and targeted promotions, along with the growth in
the customer base, led to a 19.9% increase in outgoing voice minutes on an
organic basis. In particular, Vodafone Zuhause in Germany and Vodafone Casa in
Italy, which promote fixed to mobile substitution in the home, and summer
promotions in Spain and in Italy, all contributed to strong growth in outgoing
minutes to both fixed line numbers and other Vodafone customers. These
additional voice minutes contributed to interconnect costs falling as a
percentage of voice revenue. Total voice usage in the UK increased due to the
ongoing impact of the Stop the Clock proposition and an offer to prepaid
customers, launched in July 2006, providing free weekend calls and text messages
if they spend a minimum amount during weekdays. This offer had benefited more
than 600,000 customers by 30 September 2006.
This increased voice usage was partially offset by the impact of pricing
pressures from increased competition and resulted in a 2.6% increase in outgoing
voice revenue compared with the same period last year, excluding the impact of
the disposal of the Swedish operation.
Incoming voice revenue decreased as growth in incoming voice minutes from other
mobiles was more than offset by termination rate cuts in many of the markets in
the Europe region. In Italy, termination rates were reduced from 12.1 eurocents
per minute to 11.2 eurocents per minute in July 2006 and the regulator has
indicated further reductions in both July 2007 and 2008. A further termination
rate cut has been announced in Spain, with a cut of 7% to 11.35 eurocents per
minute effective from October 2006, along with a target to lower the average
rate to 7 eurocents per minute by April 2009.
The volume of roaming minutes increased by 15.9% on an organic basis compared
with the same period last year, driven by an increased customer base and the
success of Vodafone Passport, which enables customers to take their domestic
price plan abroad for a small connection fee per call. Data for June and July
2006 showed that Vodafone Passport customers paid approximately 50% less per
minute for their voice roaming calls when compared to the average cost of
roaming in the summer of 2005. Roaming revenue increased by 0.4%, excluding the
impact of the disposal of the Swedish operations, as price declines were offset
by higher usage. The average cost of a voice roaming call for these customers is
now below 45 eurocents per minute. At 30 September 2006, almost 9 million
customers in the Group's controlled operations in the Europe region had signed
up to Vodafone Passport.
Total voice revenue decreased by 2.4% as the decline in incoming revenue
outweighed the revenue from increased outgoing voice traffic. On an organic
basis, voice revenue decreased by 0.7% compared with the same period last year,
which includes a 3.3% decline from the impact of termination rate cuts.
Non-voice revenue
Messaging revenue rose by 2.9%, or 3.7% on an organic basis. This increase was
mainly attributable to increased messaging volumes in Spain and the UK where
increased average customer bases, competitively priced offerings and targeted
promotions encouraged usage growth. In Germany, the success of voice offerings
impacted messaging volumes resulting in a small decline in messaging revenue.
Data revenue increased by 27.2%, or 29.1% on an organic basis, with the primary
driver being an additional 7.1 million 3G devices registered on the Group's
networks since 30 September 2005, bringing the total to 10.4 million devices,
and in particular, the increase in devices in the business segment. Particularly
strong growth was experienced in Germany and Spain where specific promotions
encouraged increased usage, whilst both of these markets benefited from growth
in the use of Vodafone Mobile Connect data cards. The business segment is the
impetus behind this growth in data usage with a number of markets offering flat
rate tariff options. Additionally, the launch of HSDPA technology in six
European markets assisted in increasing penetration of Vodafone Mobile Connect
data cards and has also resulted in their increased usage. In Italy and the UK,
70% and 60%, respectively, of all Vodafone Mobile Connect data cards sold are
now HSDPA enabled. In the consumer segment, Germany has had particular success
from bundling data services with a new contract tariff which encourages data
usage by offering free mobile TV, surfing the Vodafone live! portal and music
downloads for a flat fee each month.
Adjusted operating profit
Adjusted operating profit fell by 1.5%, or 2.7% on an organic basis with the
disposal of Sweden being the primary difference, whilst the EBITDA margin
decreased by 0.5 percentage points, or by 0.9 percentage points on an organic
basis. Growth in operating expenses was the principal driver for the reduction
in the EBITDA margin. However, this was partially offset by an improvement in
operating expenses for common functions, excluding certain non-recurring items,
as discussed on page 16. Increased centralisation of functions, which is
expected to demonstrate benefits over time, higher marketing and distribution
costs, including additional investment in publicity and Vodafone's own direct
sales channels, and a higher charge for the use of brand and related trademarks
in Italy, have all contributed to higher operating expenses.
Acquisition and retention costs have remained relatively stable on an organic
basis, with increases in the volume of additions in Italy, and additions and
upgrades in Spain, being offset by a reduction in sales in the indirect channel
in the UK and changes to the sales mix in Greece and the Netherlands. The small
rise in interconnect costs on an organic basis was driven by the increase in
outgoing call volumes, partially offset by decreases in termination rates and by
an improving outgoing call mix.
In Germany, the EBITDA margin was impacted by additional intercompany recharges,
presented within operating expenses, from the centralisation of data centre
operations, which were offset by a similar reduction in depreciation expense. A
higher proportion of contract additions in the indirect sales channel offset by
lower interconnect costs from the termination rate cut also contributed to the
fall in the EBITDA margin. Excluding restructuring costs of £11 million and the
impact of the data centre change, operating expenses fell due to cost
efficiencies.
Higher charges for brand and related trademarks in Italy, introduced in the
second half of the previous financial year, reduced the EBITDA margin by
approximately 1.0 percentage point. Centralisation of the local data centre in
the second quarter of the current financial year and additional publicity
expenditure also impacted the margin.
In Spain, a higher proportion of contract additions and higher total gross
additions were the main drivers in the 0.8 percentage point reduction in the
EBITDA margin. Operating expenses were broadly stable as a percentage of
revenue.
Increased voice usage, with a rise in the proportion of calls made to customers
of other mobile networks, has led to a rise in interconnect costs in the UK,
though the impact on EBITDA margin was offset by savings from targeted
acquisition and retention investment. Savings in operating expenses from
continuous cost reduction have been reinvested, particularly in increased
publicity spending.
In October 2006, Vodafone agreed terms with Phones 4u, a leading independent
mobile retailer in the UK, to be the exclusive third party retailer for Vodafone
contract customers in the UK high street. As a result, indirect connection
commissions in the second half of the current financial year are expected to be
similar to those in the same period in the previous financial year. Vodafone
expects to deliver greater value to customers acquired through the indirect
channel through a closer working relationship with Phones 4u and better targeted
propositions.
On an organic basis, adjusted operating profit in Other Europe grew by 2.5%,
whilst the EBITDA margin was broadly stable.
Europe targets
The Group has set targets in respect of revenue market share, operating expenses
and capitalised fixed asset additions. The operating expense and capitalised
fixed asset additions targets relate to the Europe region and common functions
in aggregate. Progress against the revenue market share target is measured by
tracking performance in Germany, Italy, Spain and the UK against the Group's
principal competitors. The targets are detailed in the Outlook on page 6.
During the first half of the 2007 financial year, the implementation of a range
of group wide initiatives and cost saving programmes commenced, designed to
deliver savings in the 2008 financial year and beyond. The key initiatives are
as follows:
* The application development and maintenance initiative is focusing on driving
cost and productivity efficiencies through outsourcing the application
development and maintenance for key IT systems. In October 2006, the Group
announced that EDS and IBM had been selected to provide application
development and maintenance services to separate groupings of operating
companies within the Vodafone Group and terms were agreed with EDS and IBM on
2 November 2006. The Group currently anticipates that this initiative will
result in greater economies of scale and improved quality of software
produced, as well as greater flexibility, leading to the faster rollout of
more varied services to customers.
* The supply chain management initiative focuses on centralising network related
supply chain management activities and leveraging Vodafone's scale in
purchasing activities. Through the standardisation of designs and driving
scale strategies in material categories, the Group is aiming to increase
the proportion of purchasing performed globally. In the core networks area,
the Group is introducing new suppliers and alternative transmission
technologies aimed at reducing costs.
* The IT operations initiative has created a shared service organisation to
support the business with innovative and customer focused IT services. This
organisation is aiming to consolidate localised data centres into regionalised
northern and southern centres and to consolidate hardware, software,
maintenance and system integration suppliers to provide high quality IT
infrastructure, services and solutions.
* The Group has commenced a three year business transformation programme to
implement a single integrated operating model, supported by a single ERP
system covering HR, finance and supply chain functions. The programme is
expected to provide improved information for decision making and reduced
operating costs in the longer term, though additional investment, including
restructuring expenditure, will be required in the near term.
* In summer 2006, the Group undertook a review of the organisation and of its
central functions and the balance between Group and locally managed
activities, resulting in operating expenditure savings and the reduction of
over 500 positions in the corporate centre.
* Many of the Group's operating companies are participating in external
benchmarking studies and using the results to target local cost reductions.
Initiatives that have been implemented to date include reductions to planned
network rollout, outsourcing and off shoring of customer services operations,
property rationalisation, replacing leased lines with owned transmission,
network site sharing and renegotiation of supplier contracts and service
agreements.
Mobile Plus strategy
To encourage further revenue growth within the Europe region, the Group
announced in May 2006, as part of the Group's Mobile Plus strategy, the
intention to focus on extending Vodafone's service offerings in the home and in
the office, including the provision of DSL.
The Vodafone At Home proposition is a series of initiatives and tariffs aimed at
generating additional mobile usage in the home area by specifically targeting
the substitution of fixed line usage to mobile. The offerings in Germany,
Vodafone Zuhause, and in Italy, Vodafone Casa, proved popular, with 1,378,000
and 362,000 customers respectively by the end of September 2006. These customers
are generating higher voice usage and ARPU than previously, demonstrating the
success of this proposition. Vodafone Casa was also launched in Portugal in
October 2006.
Vodafone Office is an office-based proposition that provides alternatives to the
fixed line network, by offering the opportunity to reduce the number of fixed
desk phones and encouraging fixed to mobile substitution in the office. A closed
user group tariff, allowing employees to call each other for a flat monthly fee,
is a key part of the offer. The number of Oficina Vodafone customers in Spain at
the end of September 2006 was 713,000.
In the second quarter of the financial year, it was announced that these
services would be expanded to include a DSL option in conjunction with Arcor,
the Group's fixed line operator in Germany, and Fastweb, Italy's leading
alternative broadband provider.
During September 2006, Vodafone UK announced a partnership with BT for the
provision of fixed line and DSL services, which will be available to Vodafone
consumer contract customers in early 2007.
Vodafone Germany has also signed an agreement with an advertising agency as an
initial step in facilitating revenue generation from advertising on the Vodafone
live! portal.
EMAPA
Middle
East
Eastern Africa Associates Associates
Europe & Asia Pacific US Other EMAPA % change
--------------
£m £m £m £m £m £m £ Organic
Six months ended
30 September 2006
Voice revenue 951 1,027 458 2,436 50.7 19.6
Messaging revenue 147 66 118 331 68.9 28.2
Data revenue 25 11 20 56 47.4 38.3
Fixed line and DSL
revenue - 34 - 34 - -
-------------------------------------------------------
Total service revenue 1,123 1,138 596 2,857 54.4 20.8
Acquisition revenue 23 105 48 176 46.7
Retention revenue 8 - - 8 100.0
Other revenue 8 4 22 34 (2.9)
-------------------------------------------------------
Total revenue 1,162 1,247 666 3,075 53.1 20.8
Interconnect costs (217) (178) (125) (520) 47.7 22.0
Other direct costs (141) (112) (100) (353) 73.9 14.9
Acquisition costs (91) (144) (78) (313) 51.2 19.9
Retention costs (31) (36) (24) (91) 111.6 88.6
Operating expenses (278) (246) (174) (698) 47.6 12.6
-------------------------------------------------------
EBITDA 404 531 165 1,100 50.5 23.1
Acquired intangibles
amortisation (127) (61) (1) (189) 285.7
Purchased licence
amortisation (8) (9) (7) (24) (20.0)
Depreciation and other
amortisation (151) (122) (91) (364) 35.8
Share of result in
associates - - - 1,015 390 1,405 20.3 23.7
-------------------------------------------------------
Adjusted operating
profit 118 339 66 1,015 390 1,928 24.2 26.1
=======================================================
EBITDA margin 34.8% 42.6% 24.8% 35.8%
Six months ended
30 September 2005
Voice revenue 513 643 460 1,616
Messaging revenue 59 37 100 196
Data revenue 14 5 19 38
Fixed line and DSL
revenue - - - -
-------------------------------------------------------
Total service revenue 586 685 579 1,850
Acquisition revenue 22 64 34 120
Retention revenue 4 - - 4
Other revenue 6 6 23 35
-------------------------------------------------------
Total revenue 618 755 636 2,009
Interconnect costs (130) (104) (118) (352)
Other direct costs (35) (68) (100) (203)
Acquisition costs (62) (87) (58) (207)
Retention costs (18) (15) (10) (43)
Operating expenses (139) (151) (183) (473)
-------------------------------------------------------
EBITDA 234 330 167 731
Acquired intangibles
amortisation (49) - - (49)
Purchased licence
amortisation (6) (16) (8) (30)
Depreciation and other
amortisation (89) (78) (101) (268)
Share of result in
associates - - - 772 396 1,168
-------------------------------------------------------
Adjusted operating
profit 90 236 58 772 396 1,552
=======================================================
EBITDA margin 37.9% 43.7% 26.3% 36.4%
% % % % %
Change at constant
exchange rates
Voice revenue 88.9 66.2 7.0
Messaging revenue 149.2 83.3 28.3
Data revenue 78.6 120.0 11.1
Fixed line and DSL
revenue - - -
--------------------------
Total service revenue 95.1 72.9 10.6
Acquisition revenue 4.5 78.0 45.5
Retention revenue 100.0 - -
Other revenue 33.3 (20.0) 4.8
--------------------------
Total revenue 91.1 72.7 12.1
Interconnect costs 69.5 79.8 12.6
Other direct costs 314.7 72.3 7.5
Acquisition costs 51.7 75.6 41.8
Retention costs 72.2 140.0 166.7
Operating expenses 104.4 70.8 1.2
--------------------------
EBITDA 74.9 68.0 6.5
Acquired intangibles
amortisation 159.2 - -
Purchased licence
amortisation 60.0 (43.8) -
Depreciation and other
amortisation 73.6 62.7 (3.2)
Share of result in
associates - - - 33.7 (0.8)
------------------------------------------------
Adjusted operating
profit 31.1 50.7 24.5 33.7 (0.8)
================================================
EBITDA margin movement (3.2) (1.2) (1.3)
2006 2005
------------------------------------------- -----------------------------------------
Middle Middle
East East
Eastern Africa Eastern Africa
KPIs Pacific Europe & Asia EMAPA Pacific Europe & Asia EMAPA
------------------------------------------- -----------------------------------------
Closing customers
('000) 5,423 25,879 24,169 55,471 5,059 11,119 13,266 29,444
Average monthly ARPU £18.5 £9.3 £6.9 £19.8 £10.8 £10.0
Annualised blended
churn (%) 40.7% 21.2% 45.1% 39.5% 24.1% 19.5%
3G devices ('000) 534 2 - 536 17 - - 17
Voice usage
(millions of
minutes) 5,402 15,296 17,204 37,902 4,583 5,873 7,319 17,775
See page 41 for definition of terms
Vodafone's strategy in the EMAPA region is to build on the Group's strong track
record of creating value in emerging markets, having delivered strong
performances over time in markets such as Egypt and South Africa. Selective
opportunities will be sought to increase the Group's emerging markets footprint
as well as taking opportunities to increase stakes in existing markets, with a
view to gaining control where possible over time.
EMAPA continues to perform strongly, principally driven by the emerging markets,
and has benefited from the prior year acquisitions in the Czech Republic and
India, as well as the stake increases in Romania and South Africa. However,
reported growth has been impacted by adverse exchange rate movements.
On 24 May 2006, the Group completed the acquisition of the trade and assets of
Telsim, the number two operator in Turkey, from the Turkish Savings and Deposit
Insurance Fund, for consideration of approximately US$4.7 billion. The results
of Telsim are included in Eastern Europe from the completion date.
Revenue
Total revenue increased by 53.1%, or 20.8% on an organic basis, driven by
organic service revenue growth of 20.8%. The impact of the acquisitions in the
Czech Republic, India and Turkey, as well as the stake increases in Romania and
South Africa, increased reported revenue growth by 39.0%, with the impact of
unfavourable exchange rate movements of 6.7% accounting for the remaining
difference between reported and organic growth.
A 33.9% organic increase in average customers, or 93.8% including the impact of
acquisitions and stake increases, along with the success of usage stimulation
initiatives, were the primary reasons for the increase in service revenue,
offset by declining ARPU in a number of markets from the increasing proportion
of lower usage prepaid customers. Particularly strong customer growth was
achieved in Eastern Europe and Middle East, Africa and Asia, where markets are
typically less penetrated than in Western Europe or the Pacific area.
Eastern Europe
In Eastern Europe, the acquisitions in the Czech Republic, Romania and Turkey
were the key drivers of growth in service revenue.
In the Czech Republic, an introductory offer to try Vodafone's services for
free, a summer promotion for new customers and the launch of new consumer and
business tariffs, all contributed to an increase in customers and 14.4% growth
in service revenue in local currency, assuming the Group's equity interest is
reflected in the whole of the previous period.
The launch of an innovative proposition in Romania, which provides more
flexibility for prepaid customers by allowing the validity period of SIM cards
between top ups to be extended, has had a significant positive impact on prepaid
churn and, along with continued customer growth and a 2.0% rise in ARPU,
contributed to a 31.3% organic increase in local currency service revenue. The
expansion of the 3G network, targeted promotional offers, the launch of HSDPA
and increased sales of Vodafone Mobile Connect data cards led to strong growth
in data revenue in Romania and consolidated Vodafone's market leadership in the
business segment.
The Group's acquisition in Turkey has performed ahead of the Group's
expectations at the time of the completion of the auction. Improving network
quality has contributed to 11.4% customer growth in a little over four months
since acquisition and combined with some tariff increases has led to strong
revenue growth.
Middle East, Africa and Asia
Underlying service revenue growth in the Group's operations in the Middle East,
Africa and Asia was also strong.
A combination of usage initiatives and tariff changes in the prepay market
contributed to the local currency service revenue growth of 40.2% in Egypt.
The launch of several products, services and promotions, including new prepaid
top-up packages, new bundled tariffs and Vodafone Simply, contributed to 24.9%
organic growth in the customer base of Vodacom and its subsidiaries, and drove a
20.8% organic rise in service revenue. The growth in the customer base excluded
the impact of a change in the application of the disconnection policy. Excluding
the resulting one-off disconnections, blended churn for Middle East, Africa and
Asia would have been 36.9% in the current period, which was higher than in the
previous period following the impact of the Group's acquisition in India.
The newly acquired interest in Bharti Airtel, which operates in India and is
accounted for as a joint venture, continued to perform well, with strong growth
in customer numbers and revenue.
Pacific
Service revenue growth in the Group's operations in the Pacific area was
impacted by a decrease in New Zealand's service revenue due to increased
competition and a termination rate cut at the end of the last financial year.
Excluding the impact of the termination rate cut, service revenue for the
Pacific area would have increased by 4.5%. In Australia, local currency service
revenue growth of 16.1% was achieved from the rise in the customer base, strong
prepaid usage and a focus on higher value customers, particularly with new
connections of contract customers, contributing to an increase in ARPU.
Adjusted operating profit
Adjusted operating profit increased by 24.2%, or 26.1% on an organic basis, with
the impact of unfavourable exchange rate movements impacting growth by 2.7%. The
net impact of the acquisitions, disposals and stake increases improved reported
growth by 0.8%. The EBITDA margin fell by 0.6 percentage points principally due
to the lower margins of the newly acquired operations and increased by 0.7
percentage points on an organic basis.
The acquisitions in the Czech Republic, India and Turkey, and the stake
increases in South Africa and Romania, led to the rise in acquired intangibles
amortisation. These acquisitions, combined with the continued expansion of
network infrastructure in the region, including 3G and HSDPA upgrades, led to
the rise in depreciation charges.
Eastern Europe
The impact of the newly acquired operations led to a 3.1 percentage point
decrease in the EBITDA margin in Eastern Europe. An annual regulatory fee in
Turkey amounting to 15% of revenue impacted direct costs in the current period.
Loyalty programmes were made available through indirect channels in Romania,
leading to a strong positive impact on churn along with increased investment in
retention. The decrease in margin was partly offset by a reduction in
acquisition costs in Romania which resulted from a higher proportion of sales
made through direct channels.
Middle East, Africa and Asia
The EBITDA margin in Egypt was broadly stable despite the significant customer
and revenue growth which, combined with a modest increase in depreciation
expense, led to strong operating profit growth.
Growth in reported operating profit in South Africa was impacted by 9.0% from
adverse exchange rate movements. Despite increased competition and focused
investment in retention activities, the EBITDA margin was broadly stable due to
savings in operating expenses.
Pacific
Investment in higher value customers in Australia, particularly targeted at the
contract segment, led to an improvement in revenue and lower contract churn, and
was the key driver in an increase in local currency EBITDA and adjusted
operating profit, although the additional investment contributed to a fall in
the EBITDA margin in both Australia and the Pacific area as a whole.
Associates
2006 2005 % change
--------------------------- --------------------------- -----------------
Verizon Verizon Verizon Verizon
Wireless Other Total Wireless Other Total Wireless Wireless
£m £m £m £m £m £m £ $
--------------------------- --------------------------- -----------------
Share of result of
associates
Operating profit 1,214 563 1,777 952 576 1,528 27.5 29.7
Interest (94) (7) (101) (100) (12) (112) (6.0) (4.5)
Tax (73) (166) (239) (54) (176) (230) 35.2 37.0
Minority interest (32) - (32) (26) 8 (18) 23.1 27.2
--------------------------- ---------------------------
1,015 390 1,405 772 396 1,168 31.5 33.7
=========================== ===========================
Verizon Wireless (100% basis)
Total revenue (£m) 10,327 8,891
EBITDA margin (%) 38.7% 37.1%
Closing customers
('000) 56,747 49,291
Average monthly ARPU
($) 52.6 51.6
Blended churn (%) 14.2% 15.1%
Non-voice revenue as
a percentage
of service revenue (%) 12.9% 7.5%
The US market produced another period of strong customer growth, with
penetration reaching an estimated 75% at 30 September 2006. Verizon Wireless,
the Group's associated undertaking in the US, continued to perform well,
achieving an estimated 38% share of net additions in the period, whilst
maintaining its US mobile telecommunications industry leading EBITDA margin
position. The strong net additions performance was achieved through a
combination of growth in the number of new customer additions and lower customer
churn driven by improvements in customer loyalty. The resulting increase in the
customer base together with an increase in ARPU led to a 17.9% growth in service
revenue. ARPU growth was driven by the success of data services, with Verizon
Wireless leveraging the strength of its wireless data product portfolio and
wireless broadband ('EV-DO') network coverage by obtaining exclusive handset
distribution rights for iconic handsets in the US.
Cost and revenue initiatives led to an improvement in the adjusted operating
profit margin. The Group's share of the tax attributable to Verizon Wireless for
the six months ended 30 September 2006 relates only to the corporate entities
held by the Verizon Wireless partnership. The tax attributable to the Group's
share of the partnership's pre-tax profit is included within the Group tax
charge.
Verizon Wireless consolidated its spectrum position during the six month period
with the acquisition of spectrum covering the eastern half of the US and Hawaii
for $2.8 billion, through the FCC's Advanced Wireless Services auction which
completed on 18 September 2006, licences for which are expected to be granted in
late 2006 or early 2007.
The Group's associated undertakings in EMAPA have been impacted by intense
competition and reductions in termination rates, similar to the experience of
the Groups' businesses in the Europe region, which has had a negative impact on
revenue and margins. SFR, the Group's associated undertaking in France, reported
slight growth in revenue due to good customer and usage growth offset by the
aforementioned pressures, but a marginal decrease in operating profit,
principally as a result of additional overheads to support both customer growth
and increased licence fees.
Vivendi Universal reports its third quarter results including those of SFR on 16
November 2006.
Investments
China Mobile, in which the Group has a 3.27% stake and is accounted for as an
investment, increased its customer base by 10.2% in the period to 287.1 million.
Dividends of £57 million were received in the six months ended 30 September
2006.
Other
Financial Highlights 2006 2005 % change
------------------------------ ---------------------------- --------------------
Common Other Common Other Common Other
Functions Operations Total Functions Operations Total Functions Operations
£m £m £m £m £m £m £ £
------------------------------ ----------------------------
Revenue 86 706 792 70 622 692 22.9 13.5
Direct costs - (376) (376) - (343) (343) - 9.6
Operating expenses 122 (204) (82) 112 (196) (84) 8.9 4.1
------------------------------ ----------------------------
EBITDA 208 126 334 182 83 265 14.3 51.8
Depreciation and
other amortisation (72) (43) (115) (29) (45) (74) 148.3 (4.4)
------------------------------ ----------------------------
Adjusted operating
profit 136 83 219 153 38 191 (11.1) 118.4
============================== ============================
Common functions represents the results of Partner Markets and the net result of
unallocated central Group costs and recharges to the Group's operations.
Adjusted operating profit has been impacted in the current period by
restructuring costs incurred in the central functions, principally marketing and
technology, which amounted to £30 million.
Other operations comprise the Group's interest in the fixed line
telecommunications business in Germany, Arcor. In local currency, Arcor's
revenue increased by 13.1%, primarily due to customer and usage growth,
partially offset by tariff decreases in a competitive market. The incumbent
fixed line market leader continued to drive intensive competition, although
Arcor further strengthened its position as the main competitor. Contract ISDN
voice customers increased in the current period by 58%, to 1,765,000, and DSL
customers by 80%, to 1,554,000. Together with an additional 122,000 DSL-R
customers, which is a DSL product from Deutsche Telekom resold under the Arcor
brand in areas where Arcor does not have a fixed line infrastructure, Arcor
increased its share of the DSL market to 12%. Revenue growth and cost
efficiencies led to an improvement in the EBITDA margin to 17.8%.
In October 2006, the Group announced an organisational change to its New
Business and Innovation team. This will result in Arcor becoming part of the
Europe region. The Group's preliminary announcement of results for the year
ending 31 March 2007 will present restated trading results for the Europe region
reflecting this change.
FINANCIAL UPDATE
INCOME STATEMENT
Investment income and Financing costs
Six months to Six months to
30 September 30 September
2006 2005
£m £m
Investment income 425 165
Financing costs (813) (540)
------------- --------------
(388) (375)
============= ==============
Analysed as:
- Net financing costs before dividends from investments (264) (141)
- Potential interest charges arising on settlement of
outstanding tax issues (202) (124)
- Changes in fair value of equity put rights and similar
arrangements (see note 5) 21 (151)
- Dividends from investments 57 41
------------- --------------
(388) (375)
============= ==============
Net financing costs before dividends from investments increased by 87.2% to £264
million following an increase in average net debt of 21.5%, a change in the
currency mix, higher interest rates for euro and US dollar denominated debt and
adverse mark to market adjustments on financial instruments in the current
financial year. At 30 September 2006, the provision for potential interest
charges arising on settlement of outstanding tax issues was approximately £1.0
billion.
Taxation
Six months to Six months to
30 September 30 September
2006 2005
£m £m
Tax on (loss)/profit 1,218 1,282
Share of associated undertakings' tax 240 232
Tax on items not related to underlying business performance 2 -
------------- --------------
Adjusted tax on (loss)/profit 1,460 1,514
============= ==============
(Loss)/profit before tax (3,330) 3,911
Adjustments:
- Share of associated undertakings' non-operating income (6) (19)
- Impairment losses 8,100 515
- Other income and expense (1) -
- Non-operating income and expense (10) -
- Change in fair value of equity put rights and similar
arrangements (21) 151
- Foreign exchange(1) (8) -
------------- --------------
Adjusted profit before tax 4,724 4,558
Add: Share of associated undertakings' tax and minority
interest 271 250
------------- --------------
Adjusted profit before tax for the purpose of calculating
adjusted effective tax rate 4,995 4,808
============= ==============
Adjusted effective tax rate 29.2% 31.5%
============= ==============
Note:
(1) Comprises foreign exchange differences reflected in the income statement in
relation to certain intercompany balances, and the foreign exchange
differences on financial instruments received as consideration in the
disposal of Vodafone Japan to SoftBank, which completed in April 2006.
The adjusted effective tax rate for the six months ended 30 September 2006 was
29.2% compared with 31.5% for continuing operations in the prior period. This is
based on the expected effective tax rate for the year ending 31 March 2007 of
around 30%, which is lower than the Group's long term effective tax rate as a
result of one-off events noted below.
During the period, the Group pursued an opportunity to claim additional tax
deductions introduced by the Italian government, resolved a number of historic
tax issues following discussions with tax authorities, and has not made
additional provision for the ongoing UK CFC enquiry.
The Group continues to maintain its existing provision in respect of the ongoing
enquiry by HM Revenue & Customs with regard to application of the UK CFC
legislation to the Group, as described in the Group's Annual Report for the year
ended 31 March 2006. A recent judgment in a similar case in the European Court
of Justice has provided guidance to the UK courts but it may be some time
before the enquiry is finally resolved.
Discontinued operations
On 17 March 2006, the Group announced that an agreement had been reached to sell
its 97.7% interest in Vodafone Japan to SoftBank. This resulted in the Group's
operations in Japan being classified as an asset held for sale and being
presented as a discontinued operation in the 2006 Annual Report. The disposal
was completed on 27 April 2006.
The loss includes the cumulative exchange differences previously recognised in
other recognised income and expense from 1 April 2004 through to 27 April 2006.
Six months to
30 September
2006
£m
Profit for the period from operations 111
Loss on disposal(1) (747)
Taxation 145
------
Loss from discontinued operations (491)
======
Note:
(1) Includes £794 million of foreign exchange differences transferred to the
income statement on disposal
(Loss)/earnings per share from continuing operations
Adjusted earnings per share increased by 17.7% from 5.08 pence to 5.98 pence for
the six months ended 30 September 2006. Basic earnings per share from continuing
operations fell from 4.07 pence to a loss per share of 8.02 pence for the
current period.
Adjusted earnings per share is stated before charges of 14.08 pence per share in
relation to an impairment of the carrying value of goodwill and credits of 0.03
pence per share for non-operating income, 0.04 pence per share for the change in
fair value of equity put rights and similar arrangements and 0.01 pence per
share for other items.
Total shareholder returns
Dividends
The Company provides returns to shareholders through dividends. The Company has
historically paid dividends semi-annually, with a regular interim dividend in
respect of the first six months of the financial year payable in February and a
final dividend payable in August. The directors expect that the Company will
continue to pay dividends semi-annually.
In considering the level of dividends, the Board takes account of the outlook
for earnings growth, operating cash flow generation, capital expenditure
requirements, acquisitions and divestments, together with the amount of debt.
Accordingly, the directors announce an interim dividend of 2.35 pence per share,
representing a 6.8% increase over last year's interim dividend. The Board has
also indicated that its ongoing target dividend pay-out ratio is approximately
60%, being the interim and proposed final dividends per share as a percentage of
adjusted earnings per share from continuing operations. The pay-out ratio for
the 2006 financial year was 60%.
The ex-dividend date is 22 November 2006 for ordinary shareholders, the record
date for the interim dividend is 24 November 2006 and the dividend is payable on
2 February 2007.
Special distribution of £9 billion
On 17 March 2006, the Group stated that it would make a special distribution to
shareholders of approximately £6 billion. Through targeting a low single A
credit rating, on 30 May 2006 the Group announced that it would return a further
£3 billion to shareholders, resulting in a total distribution of approximately
£9 billion in the form of a B share arrangement. This equated to 15 pence per
share.
The B share arrangement was approved at an Extraordinary General Meeting of the
Company on 25 July 2006. Payment in respect of redemption of the B share
arrangement was made in August 2006 and all but £33 million of the total amount
payable had been settled as at 30 September 2006. During such time that the
remaining B shares are outstanding, they will accrue a non-cumulative dividend
at the rate of 75% of sterling LIBOR, payable semi-annually in arrears until
redemption. The Company has the right to redeem all remaining B shares by 5
August 2008.
Other returns
As a result of targeting a lower credit rating and the £9 billion special
distribution, the Group has no current plans for further share purchases or
other one off shareholder returns. The Board will periodically review the free
cash flow, anticipated cash requirements, dividends, credit profile and gearing
of the Group and consider additional shareholder returns.
Cash flows and funding
During the six months ended 30 September 2006, net cash inflow from operating
activities fell by 18.2% to £4,975 million and generated £2,947 million of free
cash flow, as analysed in the following table:
Six months to Six months to
30 September 30 September
2006 2005
£m £m %
Net cash inflow from operating activities 4,975 6,084 (18.2)
- Continuing operations 4,840 5,227 (7.4)
- Discontinued operations 135 857
Add: Taxation 1,217 667
Purchase of intangible fixed assets (298) (252)
Purchase of property, plant and equipment (1,892) (2,328)
Disposal of property, plant and equipment 11 10
------ ------
Operating free cash flow 4,013 4,181 (4.0)
- Continuing operations 4,021 3,761 6.9
- Discontinued operations (8) 420
Taxation (1,217) (667)
Dividends received from associated undertakings(1) 371 375
Dividends paid to minority shareholders in
subsidiary undertakings (34) (21)
Dividends received from investments 57 41
Interest received 256 135
Interest paid (499) (349)
------ ------
Free cash flow 2,947 3,695 (20.2)
====== ======
- Continuing operations 2,955 3,252 (9.1)
- Discontinued operations (8) 443
Note:
(1) Six months ended 30 September 2006 includes £240 million (2005: £295
million) from the Group's interest in SFR and £119 million
(2005: £79 million) from the Group's interest in Verizon Wireless
An analysis of net debt for continuing operations is as follows:
30 September 31 March
2006 2006
£m £m
Cash and cash equivalents (as presented in the
consolidated cash flow statement) 776 2,932
Bank overdrafts 13 18
Cash and cash equivalents for discontinued operations - (161)
--------- ---------
Cash and cash equivalents (as presented in the
consolidated balance sheet) 789 2,789
--------- ---------
Trade and other receivables(1) 317 310
Trade and other payables(1) (207) (219)
Short-term borrowings (4,114) (3,448)
Long-term borrowings (17,014) (16,750)
--------- ---------
(21,018) (20,107)
--------- ---------
Net debt as extracted from the consolidated balance sheet (20,229) (17,318)
========= =========
Note:
(1) Certain mark to market adjustments on financing instruments are included
within trade and other receivables and trade and other payables
The Group revised its credit rating target when it announced its results on 30
May 2006 and now targets low single A long term credit ratings from Moody's,
Fitch Ratings and Standard & Poor's, respectively. Credit ratings are not a
recommendation to purchase, hold or sell securities, in as much as ratings do
not comment on market price or suitability for a particular investor, and are
subject to revision or withdrawal at any time by the assigning rating
organisation. Each rating should be evaluated independently.
The Group's credit ratings enable it to have access to a wide range of debt
finance, including commercial paper, bonds and committed bank facilities. In
aggregate, the Group has committed facilities of approximately £7,864 million,
of which £5,976 million was undrawn and £1,888 million drawn at 30 September
2006. The undrawn facilities include a $5.0 billion Revolving Credit Facility
that matures in June 2012 and a $5.9 billion Revolving Credit Facility that
matures in June 2009. Both facilities support US and euro commercial paper
programmes of up to $15 billion and £5 billion respectively. At 30 September
2006, $512 million (£274 million) was outstanding under the US commercial paper
programme and £30 million and $1,004 million (£680 million) were outstanding
under the euro commercial paper programme. Other undrawn facilities of £126
million are specific to the Group's subsidiary in Egypt.
The Group has a €25 billion Euro Medium Term Note (EMTN) programme and a $12
billion US shelf programme which are used to meet medium to long term funding
requirements. In the six months ended 30 September 2006, bonds with a nominal
value of £1,766 million were issued under the EMTN programme. The bonds issued
during the six months ended 30 September 2006 were as follows:
Amount US shelf programme or Euro
Date bond issued Maturity of bond Currency million Medium Term Note (EMTN) Programme
14 June 2006 14 June 2016 EUR 300 EMTN Programme
14 June 2006 13 January 2012 EUR 1,000 EMTN Programme
10 August 2006 10 January 2013 AUD 265 EMTN Programme
29 August 2006 13 January 2012 EUR 300 EMTN Programme
5 September 2006 5 September 2013 EUR 850 EMTN Programme
At 30 September 2006, the Group had bonds outstanding with a nominal value of
£16,032 million.
SIGNIFICANT TRANSACTIONS
The Group's net cash inflow resulting from acquisition and disposal activities,
including the purchase and disposal of investments, in the six months ended 30
September 2006 was £4,060 million(1) . An analysis of the significant
transactions and the changes to the Group's effective interest in the entities
is shown below:
£m
Acquisitions:
Telsim Mobil Telekomunikasyon Hizmetleri (from nil to 100% of trade
and assets)(2) 2,547
Disposals:
Vodafone Japan (from 97.7% to nil) (6,810)
Other net acquisitions and disposals, including investments 203
-------
(4,060)
=======
Notes:
(1) Amounts are shown net of cash and cash equivalents acquired
(2) Discussed in more detail on page 31
On 25 August 2006, the Group announced the sale of its 25% interest in Proximus,
the Group's associated undertaking in Belgium, for consideration of €2.0
billion. The sale completed on 3 November 2006. The sale proceeds will be used
to reduce the Group's net indebtedness. Vodafone and Proximus have signed a
revised long term partner market arrangement in Belgium, allowing Proximus and
Vodafone customers to continue to benefit from Vodafone's global products and
services. The two companies will also continue to co-operate in serving
international corporate customers.
SUBSEQUENT EVENTS
On 8 November 2006, the Group announced its intention to launch a tender offer
for an additional 4.9% of the shares in Vodafone Egypt for a maximum possible
consideration of approximately £108 million. Telecom Egypt has given an
irrevocable undertaking to accept the tender in respect of at least 3.97% and up
to 4.69% of the shares in Vodafone Egypt. If fully accepted, this tender offer
will take Vodafone's shareholding in its Egyptian subsidiary to 55%, with a
further 45% held by Telecom Egypt. Subject to regulatory approvals, the tender
offer is expected to be launched later in November 2006. Vodafone and Telecom
Egypt also announced they have entered into a strategic partnership to increase
co-operation between both parties and to jointly develop a range of products and
services for the Egyptian market.
This information is provided by RNS
The company news service from the London Stock Exchange
