Form 6-K

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Report of Foreign Private Issuer

 

Pursuant to Rules 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

Dated 1 December 2006

 

VODAFONE GROUP

PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

VODAFONE HOUSE, THE CONNECTION, NEWBURY, BERKSHIRE RG14 2FN, ENGLAND

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F

 

Form 40-F

 

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes

 

 

No

   

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82_______________

 

THIS REPORT ON FORM 6-K SHALL BE DEEMED TO BE INCORPORATED BY REFERENCE IN EACH OF AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT ON FORM F-3 (FILE NO. 333-110941) AND THE REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-81825) OF VODAFONE GROUP PUBLIC LIMITED COMPANY AND TO BE A PART THEREOF FROM THE DATE ON WHICH THIS REPORT IS FURNISHED, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS SUBSEQUENTLY FILED OR FURNISHED.


 

This Report on Form 6-K contains the following items:

 

(a)                                  Chief Executive’s Statement;

 

(b)                                 Business Review;

 

(c)                                  unaudited interim consolidated financial information for Vodafone Group Plc as of and for the six month periods ended 30 September 2006 and 2005 and comparative consolidated financial information for Vodafone as of and for the year ended 31 March 2006.

 

Certain information listed above is taken from the previously published results announcement of Vodafone for the six months ended 30 September 2006 (“interim results announcement”). This document does not update or restate any of the financial information set forth in the interim results announcement.

 

The interim Condensed Consolidated Financial Statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. The unaudited Condensed Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results of the periods presented.

 

Exhibit 7

 

                  Computation of ratio of earnings to fixed charges

 

1


 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995 with respect to the Group’s financial condition, results of operations and businesses and certain of the Group’s plans and objectives.

 

In particular, such forward-looking statements include statements with respect to Vodafone’s expectations as to launch and roll-out dates for products, services or technologies offered by Vodafone; intentions regarding the development of products and services introduced by Vodafone or by Vodafone in conjunction with initiatives with third parties;  the ability to integrate all operations throughout the Group; the development and impact of new mobile technology; anticipated benefits to the Group of the One Vodafone programme; anticipated benefits to the Group from core cost reduction programmes, outsourcing, supply chain management and IT operations initiatives; anticipated benefits to the Group of the Mobile Plus strategy; growth in customers and usage, including improvements in customer mix; future performance, including revenue, average revenue per user (“ARPU”), cash flows, costs, capital expenditure, capitalised fixed asset additions and margins; the rate of dividend growth by the Group or its existing investments; expectations regarding the Group’s access to adequate funding for its working capital requirements; expected effective tax rates and expected tax payments; the ability to realise synergies through cost savings, revenue generating services, benchmarking and operational experience; future acquisitions, including increases in ownership in existing investments and pending offers for investments; future disposals; the management of the Group’s portfolio; contractual obligations; mobile penetration and coverage rates; the impact of regulatory and legal proceedings involving Vodafone; expectations with respect to long-term shareholder value growth; Vodafone’s ability to be the mobile market leader, overall market trends and other trend projections.

 

Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as “anticipates”, “aims”, “could”, “may”, “should”, “expects”, “believes”, “intends”, “plans” or “targets”. By their nature, forward-looking statements are inherently predictive, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, the following: changes in economic or political conditions in markets served by operations of the Group that would adversely affect the level of demand for mobile services; greater than anticipated competitive activity, from both existing competitors and new market entrants, including Mobile Virtual Network Operators (“MVNOs”), which could require changes to the Group’s pricing models, lead to customer churn and make it more difficult to acquire new customers, and reduce profitability; the impact of investment in network capacity and the deployment of new technologies, or the rapid obsolescence of existing technology; slower than expected customer growth and reduced customer retention; changes in the spending patterns of new and existing customers; the possibility that new products and services, including mobile internet platforms, 3G, Vodafone live!, Vodafone Radio DJ and other products and services, will not be commercially accepted or perform according to expectations or that vendors’ performance in marketing these technologies will not meet the Group’s requirements; the Group’s ability to win 3G licence allocations; the Group’s ability to realise expected synergies and benefits associated with 3G technologies; a lower than expected impact of GPRS, 3G, Vodafone live!, Vodafone Radio DJ and other new or existing products, services or technologies on the Group’s future revenue, cost structure and capital expenditure outlays; the ability of the Group to harmonise mobile platforms and delays, impediments or other problems associated with the roll-out and scope of 3G technology, Vodafone live!, Vodafone Radio DJ and other new or existing products, services or technologies in new markets; the ability of the Group to offer new services and secure the timely delivery of high-quality, reliable GPRS and 3G handsets, network equipment and other key products from suppliers; the Group’s ability to develop competitive data content and services that will attract new customers and increase average usage; future revenue contributions of both voice and non-voice services; greater than anticipated prices of new mobile handsets; changes in the costs to the Group of or the rates the Group may charge for terminations and roaming minutes; the Group’s ability to achieve meaningful cost savings and revenue improvements as a result of its One Vodafone and outsourcing initiatives; the ability to realise benefits from entering into partnerships for developing data and internet services and entering into service franchising and brand licensing; the possibility that the pursuit of new, unexpected strategic opportunities may have a negative impact on the Group’s financial performance; developments in the Group’s financial condition, earnings and distributable funds and other factors that the Board of Directors takes into account in determining the level of dividends; any unfavourable conditions, regulatory or otherwise, imposed in connection with pending or future acquisitions or dispositions and the integration of acquired companies in the Group’s existing operations; the risk that, upon obtaining control of certain investments, the Group discovers additional information relating to the businesses of that investment leading to restructuring charges or write-offs or with other negative implications; changes in the regulatory framework in which the Group operates, including possible action by regulators in markets in which the Group operates or by the EU regulating rates the Group is permitted to charge; the impact of legal or other proceedings against the Group or other companies in the mobile telecommunications industry; the possibility that new marketing or usage stimulation campaigns or efforts and customer retention schemes are not an effective expenditure; the possibility that the Group’s integration efforts do not reduce the time to market for new products or improve the Group’s cost position; loss of suppliers or disruption of supply chains; the Group’s ability to satisfy working capital requirements through borrowing in capital markets, bank facilities and operations; changes in exchange rates, including particularly the exchange rate of pounds sterling to the euro and the US dollar; changes in statutory tax rates and profit mix which would impact the weighted average tax rate; changes in tax legislation in the jurisdictions in which the Group operates; and final resolution of open issues which might impact the effective tax rate; timing of tax payments relating to the resolution of open issues.

 

Furthermore, a review of the reasons why actual results and developments may differ materially from the expectations disclosed or implied within forward-looking statements can be found under “Risk Factors, Trends and Outlook – Risk Factors” in Vodafone Group Plc’s Annual Report on Form 20-F for the year ended 31 March 2006. All subsequent written or oral forward-looking statements attributable to the Company or any member of the Group or any persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. No assurances can be given that the forward-looking statements in this document will be realised. Neither Vodafone nor any of its affiliates intends to update these forward-looking statements.

 

2


 

PRESENTATION OF INFORMATION

 

In the discussion of the Group’s reported financial position and results for the six month period to 30 September 2006, information in addition to that contained within the unaudited Condensed Consolidated Financial Statements is presented on the basis that it provides readers with access to additional financial information regularly reviewed by management. This information is provided to assist investor assessment of the Group’s performance from period to period. However, the additional information presented is not uniformly defined by all companies in the Group’s industry. Accordingly, it may not be comparable with similarly titled measures and disclosures by other companies. Definitions of the terms and measures presented are shown on page 17.

 

In presenting and discussing the Group’s reported financial position, operating results and cash flows, certain information is derived from amounts calculated in accordance with International Financial Reporting Standards (“IFRS”), but this information is not itself an expressly permitted GAAP measure. Such non-GAAP measures, being free cash flow, net debt, organic growth and adjusted operating profit for the Group, should not be viewed in isolation to the equivalent GAAP measure. An explanation as to the use of these measures and a reconciliation to the nearest equivalent GAAP measure can be found on pages 29 to 31.

 

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.

 

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, with revenue growing organically at 20.8% 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.

 

Free cash flow from continuing operations was slightly lower at £3.0 billion in the first half of the financial year with a 6.9% increase in operating free cash flow being 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.

 

3


 

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 announced on 14 November 2006 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 a focus 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

 

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

 

4


 

BUSINESS REVIEW

 

The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements for the six month periods ended 30 September 2006 and 30 September 2005 included in this document and the Group’s Annual Report on Form 20-F for the year ended 31 March 2006.

 

The unaudited Condensed Consolidated Financial Statements for both six month periods and any information derived from the Group’s audited Consolidated Financial Statements for the year ended 31 March 2006 are prepared in accordance with IFRS. The accounting principles underlying IFRS vary in significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 17 to the unaudited Condensed Consolidated Financial Statements.

 

Results of operations

 

The analysis of revenue and operating profit below is used by management to give a more detailed understanding of the results of the Group and to enhance insight into the costs of the business. These measures are presented to enhance the discussion of revenue and expenses that follows and to enable a reader to better understand the components of revenue and expenses.

 

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

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit before taxation

 

 

 

 

 

 

 

 

 

(3,330

)

3,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit for the period from continuing operations

 

 

 

 

 

(4,548

)

2,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit from discontinued operations

 

 

 

 

 

 

(491

)

189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit for the period

 

 

 

 

 

 

 

 

 

(5,039

)

2,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss)/earnings per share from continuing operations

 

 

 

(8.02

)p

4.07

p

 

 

 

 

 

 

Diluted (loss)/earnings per share from continuing operations

 

 

 

(8.02

)p

4.06

p

 

 

 

 

 

 

Basic (loss)/earnings per share on (loss)/profit for the period

 

 

 

(8.88

)p

4.36

p

 

 

 

 

 

 

Diluted (loss)earnings per share on (loss)/profit for the period

 

 

 

(8.88

)p

4.35

p

 

 

 

 

 

 

5


 

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 all the growth in reported revenue, and accounted for more than 70% of the organic growth in revenue, with the Europe region and other operations also growing organically.

 

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.

 

Adjusted operating profit increased by 7.5% to £5,141 million, with organic growth of 7.4%. The EMAPA region achieved growth of 24.2%, 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 the 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%.

 

 

Investment income and financing costs

 

 

 

Six months to
30 September
2006

£m

 

 

Six months to
30 September
2005
£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

 

The effective tax rate for the six months ended 30 September 2006 was (36.6)% compared with 32.8% for continuing operations in the prior period. The expected effective tax rate, excluding the impairment losses, for the year ending 31 March 2007 is around 30%, which is lower than the Group’s long term expected 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 Controlled Foreign Companies (“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 on Form 20-F 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.

 

6


 

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 on Form 20-F. 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

 

Basic and diluted (loss)/earnings per share from continuing operations

 

Basic loss per share for the six months ended 30 September 2006 from continuing operations was 8.02 pence compared to earnings of 4.07 pence for the six months to 30 September 2005.

 

Earnings per share for the six months to 30 September 2006 includes a charge 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 foreign exchange.

 

The Group’s share schemes do not have a dilutive effect on the loss per share (2005: dilutive effect of 0.01p per share on earnings per share).

 

Balance sheet

 

Non-current assets decreased from £108,614 million at 31 March 2006 to £100,371 million at 30 September 2006 following the £8,100 million impairment of goodwill relating to Vodafone Germany and Vodafone Italy. Other movements within non-current assets included a decrease in investments in associated undertakings of £1,318 million and property, plant and equipment of £412 million, offset by an increase in other investments of £1,643 million. Investments in associated undertakings decreased largely due to the classification of the Group’s interest in Proximus in Belgium as an asset held for resale and exchange rate movements, offset by the Group’s equity earnings of other associated undertakings. The increase in other investments results from non-cash consideration received from Softbank in connection with the disposal of Vodafone Japan and a gain on the revaluation of the Group’s investment in China Mobile, partially offset by foreign exchange differences. Property, plant and equipment has been impacted, primarily, by a strengthening of sterling against both the euro and the South African rand in the six months to 30 September 2006.

 

Current assets decreased from £7,532 million at 31 March 2006 to £6,110 million at 30 September 2006, principally due to a decrease in cash and cash equivalents of £2,000 million, as analysed in the consolidated cash flow statement, offset by an increase in trade and other receivables from £4,438 million at 31 March 2006 to £4,963 million at 30 September 2006.

 

Equity shareholders’ funds

 

Total equity shareholders’ funds at 30 September 2006 decreased to £67,376 million from £85,425 million at 31 March 2006. The decrease primarily comprises the loss for the period of £5,105 million, net currency losses of £2,485 million and returns to shareholders of £11,321 comprising dividends and the ‘B’ share scheme, partially offset by gains on available-for-sale investments of £641 million, gains on expiration of an equity put right of £142 million, proceeds of £19 million from the issue of new shares and £45 million relating to share awards and share-based payments.

 

Inflation

 

Inflation has not had a significant effect on the consolidated results of operations and financial conditions during the six months to 30 September 2006.

 

7


 

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

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

%

 

%

 

%

 

%

 

%

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8


 

 

 

 

 

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 17 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 and service revenue in the current period is presented in the tables below. Following the table is a discussion of the impact of recurring items on revenue.

 

 

 

Total revenue
growth
%

 

Impact of exchange
rates
%

 

Impact of disposal
%

 

Estimated impact of
termination rate cuts
and other
adjustments(1)
on total revenue
growth
%

 

Total
revenue growth
excluding these
items(2)
%

 

 

 

 

 

 

 

 

 

 

 

 

 

Germany

 

(3.0

)

(0.4

)

 

3.6

 

0.2

 

Italy

 

(3.0

)

(0.4

)

 

6.5

 

3.1

 

Spain

 

15.2

 

(0.5

)

 

4.9

 

19.6

 

UK

 

(0.7

)

 

 

0.3

 

(0.4

)

Other Europe

 

(9.1

)

(0.5

)

9.8

 

3.2

 

3.4

 

Europe – Total

 

(1.0

)

(0.4

)

2.0

 

3.6

 

4.2

 

 

 

 

Service revenue
growth
%

 

Service revenue
growth at constant
exchange rates
%

 

Impact of disposal
%

 

Estimated impact of
termination rate cuts
and other
adjustments(1)
on service revenue
growth
%

 

Service
revenue growth
excluding these
items(2)
%

 

 

 

 

 

 

 

 

 

 

 

 

 

Germany

 

(2.6

)

(0.4

)

 

3.7

 

0.7

 

Italy

 

(2.9

)

(0.5

)

 

6.7

 

3.3

 

Spain

 

14.1

 

(0.6

)

 

5.4

 

18.9

 

UK

 

1.2

 

 

 

0.4

 

1.6

 

Other Europe

 

(7.5

)

(0.5

)

9.6

 

3.4

 

5.0

 

Europe – Total

 

(0.4

)

(0.4

)

1.9

 

3.9

 

5.0

 

 

Notes:

(1)   Revenue for certain arrangements is now presented net of associated direct costs

(2)   Hereinafter referred to as underlying revenue growth or underlying service revenue growth

 

Service revenue declined 0.4% as a result of the disposal of the Group’s operations in Sweden, but 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.

 

9

 


 

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 declined 8.0%, but grew 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 0.8% increase, or a 2.6% increase excluding the impact of the disposal of the Swedish operation, in outgoing voice revenue compared with the same period last year.

 

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 decreased by 0.3%, but 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

 

10


 

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.  Growth in operating expenses was the principal driver for the reduction in adjusted operating profit.  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, adjusted operating profit 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 adjusted operating profit.  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 adjusted operating profit.  Centralisation of the local data centre in the second quarter of the current financial year and additional publicity expenditure also had an impact.

 

In Spain, a higher proportion of contract additions and higher total gross additions helped drive the increase in adjusted operating profit.  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 adjusted operating profit 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.

 

Adjusted operating profit in Other Europe grew by 7.3%, or 2.5% on an organic basis principally due to the disposal of the operations in Sweden.

 

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 28.

 

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

 

11


 

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.

 

12


 

EMAPA

 

 

Eastern
Europe

 

Middle East
Africa &
Asia

 

Pacific

 

Associates
US

 

Associates
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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

%

 

%

 

%

 

%

 

%

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Acquired intangibles amortisation

 

159.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased licence amortisation

 

60.0

 

(43.8

)

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and other amortisation

 

73.6

 

62.7