SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| OR | |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: March 31, 2007 |
| OR | |
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to |
| OR | |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report: |
| Commission file number: 1-10086 | |
VODAFONE GROUP PUBLIC LIMITED COMPANY
(formerly VODAFONE AIRTOUCH PUBLIC LIMITED COMPANY)
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
Vodafone House, The Connection, Newbury, Berkshire RG14 2FN, England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered |
| See Schedule A | See Schedule A |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
| Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. |
| Ordinary Shares of 11 3/7 US
cents each 7% Cumulative Fixed Rate Shares of £1 each |
52,835,077,347 50,000 |
| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act |
| Yes No |
| If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
| Yes No |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: |
| Yes No |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): |
| Large accelerated filer Accelerated filer Non-accelerated filer |
| Indicate by check mark which financial statements item the registrant has elected to follow: |
| Item 17 Item 18 |
| If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
| Yes No |
SCHEDULE A
| Title of each class | Name of each exchange on which registered |
| Ordinary shares of 11 3/7 US cents each | New York Stock Exchange* |
| American Depositary Shares (evidenced by American Depositary Receipts) each representing ten ordinary shares | New York Stock Exchange |
| Floating rate notes due June 2007 | New York Stock Exchange |
| 4.161% due November 2007 | New York Stock Exchange |
| Floating rate notes due December 2007 | New York Stock Exchange |
| 3.95% due January 2008 | New York Stock Exchange |
| Floating rate notes due June 2011 | New York Stock Exchange |
| 5.5% due June 2011 | New York Stock Exchange |
| 5.35% due Feb 2012 | New York Stock Exchange |
| Floating rate notes due Feb 2012 | New York Stock Exchange |
| 5% due December 2013 | New York Stock Exchange |
| 5.375% due January 2015 | New York Stock Exchange |
| 5% due September 2015 | New York Stock Exchange |
| 5.75% March 2016 | New York Stock Exchange |
| 5.625% due Feb 2017 | New York Stock Exchange |
| 4.625% due July 2018 | New York Stock Exchange |
| 6.25% due November 2032 | New York Stock Exchange |
| 6.15% due Feb 2037 | New York Stock Exchange |
| * Listed, not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. | |
Delivering on
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our strategic |
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| objectives | ||||
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Vodafone Group Plc |
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| Annual Report on Form 20-F | ||||
| For the year ended 31 March 2007 | ||||
Our
goal is to be the |
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communications leader |
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| in an increasingly | ||||
| connected world | ||||
| This constitutes the Annual Report on Form 20-F (the “20-F”) of Vodafone Group Plc (the “Company”) in accordance with the requirements of the US Securities and Exchange Commission (the “SEC”) and is dated 14 June 2007. This document contains certain information set out within the Company’s Annual Report in accordance with International Financial Reporting Standards (“IFRS”) and with those parts of the UK Companies Act 1985 applicable to companies reporting under IFRS, dated 29 May 2007, as updated or supplemented at the time of filing of the 20-F with the SEC, which may be later amended if necessary. References to IFRS refer to IFRS as issued by the IASB and IFRS as adopted for use in the European Union (“EU”). The content of the Group’s website (www.vodafone.com) should not be considered to form part of this Annual Report or the Company’s Annual Report on Form 20-F. The terms “Vodafone”, the “Group”, “we”, “our” and “us” refer to the Company and, as applicable, its subsidiary undertakings and/or its interests in joint ventures and associated undertakings. In the discussion of the Group's reported financial position and results for the year ended 31 March 2007, information in addition to that contained within the Consolidated Financial Statements is presented on the basis that it provides readers with 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, including those in the Group's industry. Accordingly, it may not be comparable with similarly titled measures and disclosures by other companies. Definitions of the terms presented are shown on page 159. |
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 IFRS but this information is not itself an expressly permitted GAAP measure. Such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure. An explanation as to the use of these measures and reconciliations to their nearest equivalent GAAP measures can be found on pages 62 to 63. The Report of the Directors, incorporating the Business Review, covers pages 4 to 88 of this Annual Report. This Annual Report 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 business management and strategy, plans and objectives for the Group. For further details, please see “Performance – Cautionary Statement Regarding Forward-Looking Statements” and “Performance – Risk Factors, Seasonality and Outlook” for a discussion of the risks associated with these statements. Vodafone, the Vodafone logos, Vodafone live!, Vodafone Mobile Connect, Vodafone Wireless Office, Vodafone Passport, Vodafone At Home, Vodafone Office, Vodafone Applications Service, Vodafone Business Email, Vodafone Travel Promise, Vodafone Push Email, Vodafone Consumer Push Email and Vodafone ßetavine are trademarks of the Vodafone Group. Other product and company names mentioned herein may be the trademarks of their respective owners. |
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Highlights for the Year
| Key highlights: | |
| • | The Group has delivered against its financial and operating targets and made good progress on executing against its five strategic objectives |
| • | Voice and data usage growth offset competitive and regulatory pressures in Europe |
| • | Continued strong performance in emerging markets, with the recent acquisition in India significantly increasing Vodafone’s presence in high growth markets |
| • | The Group remains confident of delivering its stated capital and operating expenditure targets in Europe in the 2008 financial year, with core cost reduction initiatives well on track |
| Financial performance from continuing operations: | |
| • | Group revenue of £31.1 billion |
| • | Basic loss per share was 8.94 pence, with loss before taxation for the year of £2.4 billion, after impairment losses of £11.6 billion |
| • | Free cash flow of £6.1 billion and net cash inflow from operating activities of £10.2 billion, after net taxation paid of £2.2 billion |
| Increasing returns to shareholders: | |
| • | Total dividends per share increased by 11.4%, to 6.76 pence, with a final dividend per share of 4.41 pence, giving a dividend pay out ratio of 60% and a total pay out of £3.6 billion for the financial year |
| • | In recognition of the earnings dilution arising from the Hutchison Essar transaction, the Board is targeting modest increases in dividend per share in the near term until the payout ratio returns to 60% in accordance with current policy |
Financial Highlights
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The selected financial data set out on the following pages is derived from the Consolidated Financial Statements of the Company on pages 92 to 142 and as such should be read in conjunction with them. Certain trends within the financial data presented below have been impacted by business acquisitions and disposals, the most significant of which are described in “Business –Business Overview – How We Developed”. The Consolidated Financial
Statements are prepared in accordance with IFRS, on the basis set out in note 1 to the Consolidated Financial Statements, which differ in certain significant respects from US GAAP. For further details, see note 38 to the Consolidated Financial Statements. Solely for convenience, amounts represented below in dollars have been translated at $1.9685: £1, the Noon Buying Rate on 30 March 2007.
| At/year ended 31 March | |||||||||
| 2007 | 2007 | 2006 | 2005 | ||||||
| $m | £m | £m | £m | ||||||
| IFRS | |||||||||
| Consolidated Income Statement Data | |||||||||
| Revenue | 61,228 | 31,104 | 29,350 | 26,678 | |||||
| Operating (loss)/profit | (3,079 | ) | (1,564 | ) | (14,084 | ) | 7,878 | ||
| Adjusted operating profit (Non-GAAP measure)(1) | 18,762 | 9,531 | 9,399 | 8,353 | |||||
| (Loss)/profit before taxation | (4,691 | ) | (2,383 | ) | (14,853 | ) | 7,285 | ||
| (Loss)/profit for the financial year from continuing operations | (9,461 | ) | (4,806 | ) | (17,233 | ) | 5,416 | ||
| (Loss)/profit for the financial year | (10,427 | ) | (5,297 | ) | (21,821 | ) | 6,518 | ||
| Consolidated Cash Flow Data(2) | |||||||||
| Net cash flows from operating activities | 20,065 | 10,193 | 10,190 | 9,240 | |||||
| Net cash flows from investing activities | 8,132 | 4,131 | (6,654 | ) | (4,122 | ) | |||
| Net cash flows from financing activities | (18,352 | ) | (9,323 | ) | (4,540 | ) | (7,242 | ) | |
| Free cash flow (Non-GAAP measure)(1) | 12,061 | 6,127 | 6,418 | 6,592 | |||||
| Consolidated Balance Sheet Data | |||||||||
| Total assets | 215,780 | 109,617 | 126,738 | 147,197 | |||||
| Total equity | 132,466 | 67,293 | 85,312 | 113,648 | |||||
| Total equity shareholders’ funds | 132,021 | 67,067 | 85,425 | 113,800 | |||||
| Total liabilities | 83,314 | 42,324 | 41,426 | 33,549 | |||||
| Earnings Per Share (“EPS”)(3) | |||||||||
| Weighted average number of shares (millions) | |||||||||
| – | Basic | 55,144 | 55,144 | 62,607 | 66,196 | ||||
| – | Diluted | 55,144 | 55,144 | 62,607 | 66,427 | ||||
| Basic (loss)/earnings per ordinary share | |||||||||
| – | (Loss)/profit from continuing operations | (17.60 | )¢ | (8.94 | )p | (27.66 | )p | 8.12 | p |
| – | (Loss)/profit for the financial year | (19.37 | )¢ | (9.84 | )p | (35.01 | )p | 9.68 | p |
| Diluted (loss)/earnings per ordinary share | |||||||||
| – | (Loss)/profit from continuing operations | (17.60 | )¢ | (8.94 | )p | (27.66 | )p | 8.09 | p |
| – | (Loss)/profit for the financial year | (19.37 | )¢ | (9.84 | )p | (35.01 | )p | 9.65 | p |
| Basic (loss)/earnings per ADS | |||||||||
| – | (Loss)/profit from continuing operations | (176.0 | )¢ | (89.4 | )p | (276.6 | )p | 81.2 | p |
| – | (Loss)/profit for the financial year | (193.7 | )¢ | (98.4 | )p | (350.1 | )p | 96.8 | p |
| Diluted (loss)/earnings per ADS | |||||||||
| – | (Loss)/profit from continuing operations | (176.0 | )¢ | (89.4 | )p | (276.6 | )p | 80.9 | p |
| – | (Loss)/profit for the financial year | (193.7 | )¢ | (98.4 | )p | (350.1 | )p | 96.5 | p |
| 2 | Vodafone Group Plc Annual Report 2007 |
| Highlights | |
|
| At/year ended 31 March | ||||||||||||
| 2007 | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||
| $m | £m | £m | £m | £m | £m | |||||||
| US GAAP | ||||||||||||
| Consolidated Income Statement Data | ||||||||||||
| Revenue | 49,919 | 25,359 | 23,756 | 21,370 | 19,637 | 15,487 | ||||||
| Net loss(4) | (8,514 | ) | (4,325 | ) | (13,270 | ) | (13,752 | ) | (8,105 | ) | (9,072 | ) |
| Consolidated Balance Sheet Data | ||||||||||||
| Shareholders’ equity | 139,923 | 71,081 | 86,984 | 107,295 | 129,141 | 140,580 | ||||||
| Earnings per share (“EPS”)(3) | ||||||||||||
| Weighted average number of shares – basic and diluted (millions) | 55,144 | 55,144 | 62,607 | 66,196 | 68,096 | 68,155 | ||||||
| Basic and diluted loss per ordinary share | (15.43 | )¢ | (7.84 | )p | (21.20 | )p | (20.77 | )p | (11.90 | )p | (13.31 | )p |
| Basic and diluted loss per ADS | (154.3 | )¢ | (78.4 | )p | (212.0 | )p | (207.7 | )p | (119.0 | )p | (133.1 | )p |
| Cash Dividends(3)(5) | ||||||||||||
| Amount per ordinary share | 13.31 | ¢ | 6.76 | p | 6.07 | p | 4.07 | p | 2.0315 | p | 1.6929 | p |
| Amount per ADS | 133.1 | ¢ | 67.6 | p | 60.7 | p | 40.7 | p | 20.315 | p | 16.929 | p |
| Other Data | ||||||||||||
| IFRS | ||||||||||||
| Ratio of earnings to fixed charges(6) | – | – | – | 7.0 | ||||||||
| Deficit | (8,640 | ) | (4,389 | ) | (16,520 | ) | – | |||||
| US GAAP | ||||||||||||
| Ratio of earnings to fixed charges(6) | – | – | – | – | – | – | ||||||
| Deficit(7) | (13,319 | ) | (6,766 | ) | (13,875 | ) | (9,756 | ) | (9,059 | ) | (8,436 | ) |
| Notes: | |
| (1) | Refer to “Performance – Non-GAAP Information” on page 62 for a reconciliation of this non-GAAP measure to the most comparable GAAP measure and a discussion of this measure. |
| (2) | Amounts reported refer to continuing operations. |
| (3) | See note 8 to the Consolidated Financial Statements, “(Loss)/earnings per share”. Earnings per American Depository Share (“ADS”) is calculated by multiplying earnings per ordinary share by ten, the number of ordinary shares per ADS. Dividend per ADS is calculated on the same basis. |
| (4) | 2005 net loss includes the cumulative effect of accounting changes related to intangible assets and post employment benefits that increase net loss by £6,372 million or 9.63p per ordinary share. |
| (5) | The final dividend for the year ended 31 March 2007 was proposed by the directors on 29 May 2007. |
| (6) | For the purposes of calculating these ratios, earnings consist of profit before tax adjusted for fixed charges, dividend income from associated undertakings, share of profits and losses from associated undertakings and profits and losses on ordinary activities before taxation from discontinued operations. Fixed charges comprise one-third of payments under operating leases, representing the estimated interest element of these payments, interest payable and similar charges and preferred share dividends. |
| (7) | The deficits for the 2003 and 2004 financial years are presented on the same basis as the Form 20-F for the year ended 31 March 2004. These deficits have not been restated for the effect of discontinued operations, because the UK GAAP information, which forms the basis of the US GAAP information presented, has not been restated. Even if any such adjustments were made, it is expected that the ratio of earnings to fixed charges would still show a deficit. |
| Vodafone Group Plc Annual Report 2007 | 3 |
Chairman’s Statement
Reaching the 200 million proportionate customer milestone has been a tremendous achievement for your Company and now we are on the edge of a further revolution as we enter the era of broadband and internet communications.
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| Dividend per share | |||||
| 2006 | 2007 | ||||
| 6.07p | 6.76p | 11.4% | |||
It was an honour to become your Chairman at the AGM in July 2006. I joined Vodafone from the world of banking, whose history and institutions run back over many centuries. The mobile telephone industry is very much younger and even in the last twenty years has seen dramatic changes which have transformed the face of telecommunications and society. When Vodafone first started to operate more than 20 years ago, the telecommunications industry was dominated by fixed line companies. A one hour local phone call within the UK cost £4.56; today, the same call on the Vodafone network could cost as little as 21 pence.
With the unprecedented growth of mobile communications since the mid 1980s, the effects on other sectors, the wider economy and society as a whole have been far reaching. Changes in communications have underpinned the development of the whole IT industry, helped economic growth, particularly in developing markets, and enabled families, friends and communities to communicate across countries and time zones.
Mobile telephones have been of enormous benefit to society and, as a market leader, Vodafone has played a major role. Reaching the 200 million proportionate customer milestone in this financial year has been a tremendous achievement for your Company and now we are on the edge of a further revolution as we enter the era of wireless broadband and internet communications.
There are currently around three billion mobile customers globally. At the moment, the majority are in the western world. We believe we will see 70% of the growth in customers in the next five years coming from emerging markets. The challenges we face in these markets are very different from the challenges we face in our European and mature markets. We will continue to expand in markets where mobile handsets are not widely dispersed and where there is rising GNP per capita. This is why we have acquired the business of Hutchison Essar in India, to deliver a major presence in a market with penetration of around 14%, which we believe will become larger than the European Union within a reasonable time frame.
The challenge in Europe, where the markets are mature and penetration is, in many cases, over 100%, is quite different and we need to find more efficiencies through initiatives such as network sharing to improve our productivity and developing other services beyond voice to help us grow new revenue.
Across the world, governments and regulators see our industry in very different ways, from being a source of tax revenue through to being an important part of the social and economic infrastructure of the country. The impact of regulation on our business can be significant, as we have seen during the year with the government intervention on our tariffs in Italy and at a European level on roaming.
 |
The Vodafone brand is enormously well known and highly regarded across the globe. It was recently rated the most powerful UK brand by the leading research company Millward Brown, and number 22 in the world.
Your Board takes the management of Vodafone’s reputation very seriously, together with our commitments in corporate responsibility. We have set out clearly in a separate report what we have achieved in this area. We are particularly proud of our global handset recycling initiative and our ongoing programme on energy efficiency in our networks.
The Board is very conscious of the concerns which are expressed about possible health issues in relation to mobile phones. As a responsible company, we fund and support independent research into this important area and our policy is to be completely transparent in relation to this issue, which your Board reviews on a regular basis.
On the Board, there have been a number of changes since the AGM in 2006. We said farewell to Thomas Geitner as an executive director and we thank him for all he has done for the business and wish him well in the future. Alec Broers retires from the Board at this year’s AGM and we are grateful for his significant contribution, including his chairmanship of the Vodafone Group Foundation, over his nine years as a non-executive director. We welcomed back Vittorio Colao as Deputy Chief Executive and Chief Executive of our European region. We have appointed three new non-executive directors, Alan Jebson, Nick Land and Simon Murray. We need non-executive directors who are equipped with the skill set to understand the rapidly changing markets in terms of consumer taste, technology and the emerging markets in which we operate. Future appointments will ensure that we have the right balance of skills and experience. During the year we also completed an independent Board evaluation by MWM Consulting to ensure the highest standards of corporate governance.
Your Board looks at any acquisition in a disciplined way and our decision to acquire Hutchison Essar was completed within the financial criteria we have set ourselves. We also take decisions to sell businesses or minority shareholdings where better value for shareholders is more likely to arise from reinvestment elsewhere or by returning the funds through dividends or buybacks. During the year, we sold our interests in Belgium and Switzerland for this reason.
We are confident about Vodafone’s future and your Board has proposed a final dividend of 4.41 pence per share, bringing total dividends for the year to 6.76 pence per share, up 11.4% on last year, and representing a payout ratio of 60% of adjusted earnings per share. We continue to look for sources of profitable growth within highly penetrated markets. We have a particularly strong position in the business sector which we intend to develop further. We also plan to grow services beyond core voice and messaging and continue to search for new sources of revenue which are closely related to our customer’s needs.
The mobile phone is an enormously versatile device and one of the features of the last 20 years has been the new uses to which the phone can be adapted, including data services, entertainment, advertising, internet portals and, most recently, financial payments.
In my first months as Chairman, I have spent time in and around the Group meeting customers, suppliers, business partners, other stakeholders and my new colleagues in our offices, retail stores, call centres and canteens. I have also visited seven of our international operations. I have been enormously impressed by the talented people at all levels within Vodafone and I am fortunate to be involved with such a young and dynamic business.
Your Board wants to pay tribute to all our 66,000 people and to thank them on your behalf for all they do to help Vodafone progress in a rapidly changing business environment. We, as a Board, look forward to your continuing support as we address the challenges ahead.
Sir John Bond
Chairman
| Strategy | |
Group at a Glance
Vodafone is a world leader in providing voice and data communications services for both consumer and enterprise customers, with a significant presence in Europe, the Middle East, Africa, Asia, Pacific and the United States. The Group is structured into two regions to address the different business challenges inherent in them.
Europe
| Markets | Key Focus | ||||
| Germany | Greece | Revenue | |||
| Italy | Ireland | stimulation and | |||
| Spain | Malta | cost reduction | |||
| UK | Netherlands | ||||
| Albania | Portugal | ||||
| Key market data(2) | |||||
| Average mobile customer penetration | Mobile share of total minutes | ||||
| >100% | 33% | ||||
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| Contribution to | |||||
| Contribution to | Group adjusted | ||||
| Group revenue | 79% | operating profit | 59% | ||
EMAPA(1)
| Markets | Key Focus | ||||||
| Czech Rep. | Kenya | Fiji | Deliver | ||||
| Hungary | South | India | strong growth | ||||
| Poland | Africa | USA | in emerging | ||||
| Romania | Australia | France | markets | ||||
| Turkey | New | China | |||||
| Egypt | Zealand | ||||||
| Key market data(2) | |||||||
| Average mobile customer penetration | |||||||
| 27% | |||||||
| Notes: | |
| (1) | Eastern Europe, Middle East & Africa, Asia Pacific and affiliates (associated undertakings and investments). |
| (2) | Industry analyst information: ‘Total minutes’ is for mobile and fixed line operators. Market penetration data for EMAPA excludes USA, France and China. |
 |
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| Contribution to | |||||
| Contribution to | Group adjusted | ||||
| Group revenue | 21% | operating profit | 39% | ||
| (3) | Excludes non-operating income and expense of associates, impairment losses and other income expense. |
| Vodafone Group Plc Annual Report 2007 | 5 |
Chief Executive’s Review
We updated our strategy in 2006 and have made good progress executing each strategic objective throughout the year. We have met or exceeded our stated financial expectations for the year in all areas and your business is well positioned for the future.
| Our strategic objectives | ||
| • | Revenue stimulation and cost reduction in Europe | |
| • | Innovate and deliver on our customers’ total communications needs | |
| • | Deliver strong growth in emerging markets | |
| • | Actively manage our portfolio to maximise returns | |
| • | Align capital structure and shareholder returns policy to strategy | |
The past 12 months have been an important period for Vodafone. We updated our strategy in 2006 to address changing customer needs, the availability of new technologies, a growing demand for broadband services and the greater growth potential of emerging markets. This new strategy is positioning us well as competition and regulatory pressures increase and our customers have greater choice in communications.
Operationally, we have grown new revenue streams across the Group and implemented numerous programmes to significantly reduce our cost base. Our emerging markets assets have continued to show strong growth and our recent acquisition in India significantly increases our presence in high growth markets. Our customer franchise was further strengthened both through organic growth and acquisition and now exceeds 206 million proportionate customers.
We have met or exceeded our stated financial expectations for the year in all areas. Robust cash generation continues to support returns to our shareholders, with dividends per share increasing by 11.4% to 6.76 pence per share, representing a payout of 60% of our adjusted earnings per share.
We have made good progress executing our updated strategy throughout the year and we are now beginning to realise some positive early results. We will remain focused on executing our strategic objectives in the year ahead and believe your business is well positioned to be the leader in the communications industry.
Financial review
Statutory revenue increased
by 6% to £31.1 billion, with organic revenue growth of 4.3%. The Europe
region, where competitive and regulatory pressure is most intense, delivered
organic revenue growth of 1.4%. Continued strong progress in Spain, which
delivered another year of double digit revenue growth, offset year on year
declines in Germany and Italy. The market environment is challenging for all
operators in Europe. However, we have outperformed our principal competitors
in Germany and Spain on revenue and EBITDA growth, and have delivered a similar
performance to our principal competitor in Italy. In the UK, we revised our
tariffs mid-way through
“We have launched innovative offerings and are lowering our cost structure to position us well for the future”
the year to improve our competitiveness and share of market growth. Our EMAPA region produced strong growth, with organic revenue up 21.1% and strong performances in many emerging markets.
While overall voice revenue remains under pressure, messaging and, in particular data revenue, continue to show strong organic growth of 7% and 31% respectively. Data revenue reached £1.4 billion, primarily from business services and the continued growth in the take up of 3G devices in our customer base, which doubled to 15.9 million.
Our focus on profitable growth delivered a 4.2% organic increase in adjusted operating profit, with 1.4% growth in total. Strong performances in the US, Spain and a number of emerging markets offset declines in our other major European markets.
We invested £4.2 billion in capital expenditure during the year and have now achieved the core level of 3G and HSDPA coverage across our European networks necessary for the wider uptake of high speed data services. Free cash flow generation remained strong at £6.1 billion, although lower than last year, primarily due to higher tax payments as expected.
We now have an unrivalled global customer reach, with over 206 million proportionate customers across 25 countries, adding over 35 million customers during the year. We completed the sale of our operation in Japan in April 2006 and of our minority interests in Belgium and Switzerland later in the year. In May 2006, we completed the acquisition of the assets of Telsim in Turkey and more recently gained a controlling position in a leading Indian operator.
Delivering on our strategy
In May 2006, we introduced five new
strategic objectives to ensure our continued success. Our focus on executing
this strategy throughout the year has generated positive results across a number
of areas.
Revenue stimulation and cost reduction in Europe
In Europe, our focus is to drive additional usage and revenue from core mobile voice and messaging services and to reduce our cost base. Central to stimulating revenue is driving
mobile usage through larger minute bundles, innovative tariffs, prepaid to contract migrations and targeted promotions. We are also focused on leveraging our market leading position in the business segment, which represents 25% of our service revenue in Europe. New tariff options, such as free weekends, have been launched in the UK and Germany that stimulated usage and in Italy we ran successful
voice and messaging promotions during the
year that increased revenue per customer. We also continued to perform well in
Spain, driving an increase in total voice minutes of around 30%. However, pricing
pressure is expected to remain strong in the year ahead and improving price elasticity
is core to our revenue stimulation objective in Europe.
| 6 | Vodafone Group Plc Annual Report 2007 |
| Strategy | |
Over 11 million customers now benefit from lower roaming pricing through Vodafone Passport and our European customers are now benefiting from our commitment to reduce roaming prices by 40% compared to summer 2005. We expect roaming revenues to be lower year on year in 2008 due to the combined effect of Vodafone’s own initiatives and direct regulatory intervention.
During the year, we began implementing the core cost reduction programmes we developed last year. We have successfully outsourced IT application development and maintenance and we are well on track to deliver expected unit cost savings of approximately 25% to 30% within two to four years. We have also made faster than expected progress on data centre consolidation, with anticipated savings of 25% to 30% in one to two years. Centralisation of our network supply chain management was also completed in April 2007 and is expected to reduce costs by around £250 million within one year.
In addition, we are seeking to reduce the longer term cost of ownership of our networks through network sharing arrangements and have announced initiatives in Spain and the UK.
While many of these cost initiatives are multi-year programmes that are expected to deliver significant benefits over time, we are focused on realising some early savings in the year ahead and, for Europe and common functions, continue to target a 10% mobile capital expenditure to revenue ratio next year, with broadly stable mobile operating expenses compared to the 2006 financial year.
Innovate and deliver on our customers’ total communications needs
There are several key initiatives
underway in this area and we expect these to begin to become more significant
to the Group towards the end of next year.
As part of our drive to substitute fixed line usage with mobile, we have launched several fixed location pricing plans offering customers fixed line prices when they call from within or around their home or office. These offerings target fixed to mobile substitution from home and office environments and are proving popular with customers. Vodafone At Home and Vodafone Office are currently available in seven markets for consumers and twelve markets for businesses, with over three million and over two million customers respectively.
Complementary to our high speed mobile broadband (HSDPA) offerings, Vodafone is now offering fixed broadband services (DSL) in five markets. With the exception of Arcor, our fixed line business in Germany, the provision of these services to date has been on a resale basis. We will continue to develop our approach for the provision and roll out of DSL services on a market by market basis and in some cases may complement our resale approach by building or acquiring our own infrastructure where the returns justify the investment.
We are also developing products and services to integrate the mobile and PC environments by enhancing our Vodafone live! service and forming partnerships with leading internet players. In the coming months, our customers will be able to experience PC to mobile instant messaging with Yahoo! and Microsoft, search with Google, auctions via eBay, videos through YouTube and social networking with MySpace, all via their mobile.
Mobile advertising is also a potentially significant future revenue stream for our business. We have signed agreements with Yahoo! in the UK and leading providers in Germany and Italy to enter into this new business through banner and content based advertising.
Deliver strong growth in emerging markets
Our focus is to build on our strong
track record of creating value in emerging markets. We have delivered further
strong growth in our existing operations in Egypt, Romania and South Africa.
Our recent acquisition in Turkey has performed ahead of our business plan at
the time of the acquisition, with strong revenue growth and better than expected
profitability.
The acquisition of interests in Hutchison Essar accelerates Vodafone’s move to a controlling position in a leading operator in India and significantly increases our presence in emerging markets. With market penetration of around 14% and with a population of over 1.1 billion, India provides a very significant opportunity for future growth. We look forward to bringing Vodafone’s products, services and brand to the Indian market.
Actively manage our portfolio to maximise returns
Our strategy is to invest only where
we can generate superior returns for our shareholders. We look to invest in markets
that offer a strong local position, with a focus on specific regions, with any
transactions
subject to strict financial investment criteria.
“India exposes us to one of the fastest growing communications markets in the world”
In line with this strategy, we executed a number of transactions during the year. We sold our non-controlling interests in Belgium and Switzerland at attractive valuations, with cash proceeds of £1.3 billion and £1.8 billion respectively. More recently, we increased our emerging markets presence with an additional 4.8% interest in Vodafone Egypt and gained control in India for £5.5 billion in May 2007.
We remain committed to our investment in Verizon Wireless in the US which continues to deliver strong performances on all key metrics, with record customer growth, due in part to a market leading low churn rate, and continued success in driving the uptake of non-voice services.
Align capital structure and shareholder returns policy to strategy
In May 2006, we outlined a new capital
structure and returns policy consistent with the operational strategy of the
business, resulting in a targeted annual 60% payout of adjusted earnings per
share in the form of
dividends.
We also moved to a higher level of gearing and, having returned over £19 billion to shareholders excluding dividends in the two previous financial years, including a £9 billion one-off return in August 2006, we have no current plans for further share purchases or one-time returns. The Board remains committed to its existing policy of distributing 60% of adjusted earnings per share by way of dividend. However, in recognition of the earnings dilution arising from the Hutchison Essar acquisition, it has decided that it will target modest increases in dividend per share in the near term until the payout ratio returns to 60%.
Prospects for the year ahead
Our focus in the year ahead
will be on improving price elasticity in Europe, achieving more savings from
our cost reduction programmes, delivering on our total communications strategy
and beginning to realise the very
significant growth opportunity in India.
We expect market conditions to remain challenging for the year ahead in Europe, notwithstanding continued positive trends in data revenue and voice usage. Overall growth prospects for the EMAPA region remain strong due to increasing market penetration and they are further enhanced by the recent acquisition in India.
Against this background, Group revenue is expected to be in the range of £33.3 billion to £34.1 billion, with adjusted operating profit in the range of £9.3 billion to £9.8 billion. Capital expenditure on fixed assets is anticipated to be in the range of £4.7 billion to £5.1 billion, including in excess of £1.0 billion in India. Free cash flow is expected to be £4.0 billion to £4.5 billion, after taking into account £0.6 billion of payments related to long standing tax issues, a net cash outflow of £0.8 billion in respect of India and a £0.5 billion outflow from items rolling over from 2007.
We have completed the first year under our new strategy and I am excited by the start we have made. We have made good progress towards fulfilling our total communications vision and this is a journey that we are all looking forward to taking at Vodafone.
We are well placed to continue executing our strategy in the year ahead, to deliver the core benefits of mobility to our customers and to generate superior returns for our shareholders.
Arun sarin
Chief Executive
| Vodafone Group Plc Annual Report 2007 | 7 |
Delivering on Our Strategic Objectives
The Group has established several core cost reduction programmes, leveraging the benefits of its local and |
Summer promotions driving usage
in Italy |
|||||||
| Revenue stimulation and cost reduction in Europe | ||||||||
The Group’s strategy is to drive additional usage and revenue from core mobile voice and messaging services, which represents around 80% of revenue in Europe today, and to reduce its cost base. Today, around one third of voice traffic is carried over mobile networks, with
|
Vodafone’s customers only using their mobiles for approximately 140 minutes on average per month. This provides a significant opportunity to drive greater voice usage onto mobile. The Group has launched a number of initiatives to achieve this through larger minute bundles, innovative
|
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|
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| Innovate and deliver on our customers’ total communications needs | |||||||
The communications environment is constantly evolving and Vodafone is at the forefront of this change. Customers are increasingly looking for one supplier to address all their needs, whether that is for mobile or fixed services. The Group is increasingly targeting its propositions on replacing traditional fixed line providers in the home or office, as well as developing new and innovative ways for customers to enjoy the benefits of mobility. |
Vodafone is already delivering broadband and data services to customers and, together with industry leading partners, will shortly be driving new revenue streams from opening up the internet to the mobile and from mobile advertising. In total, the Group expects its total communications initiatives to represent approximately 20% of Group revenue in three years’ time, increasing from approximately 10% for the 2007 financial year. |
|
|||||
| Deliver strong growth in emerging markets | Egypt, Romania and South Africa, with Turkey performing ahead of the business plan at the time of the acquisition. As a result of the Group’s increased presence in emerging markets, the proportion of Group EBITDA from the EMAPA region is expected to increase from 19% this year to around 33% in five years’ time. |
Vodafone will continue to seek selective opportunities to increase its emerging markets footprint as well as taking opportunities to increase its stakes in existing markets, with a view to gaining control over time. Romania: Market leader for
business services |
||||||
| The Group’s focus is to build on its strong track record of creating value in emerging markets where average market penetration is relatively low, offering significant customer and revenue growth potential. In the last 12 months, Vodafone has gained control of businesses in |
Turkey, with a population of 70 million, and in India, with a population of 1.1 billion, adding to the Group’s existing emerging market presence in parts of the Middle East, Africa and Eastern Europe. During the 2007 financial year, the Group saw strong performances in |
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| EMAPA region – annual growth for 2007 | Reported | Organic | ||
| Closing customers | 55% | 27% | ||
| Revenue | 41% | 21% | ||
|
Where applicable, growth percentages are stated on local currency and are calculated by applying the Group’s current equity interest to the whole of the 2007 and 2006 financial years. |
||||
| 8 | Vodafone Group Plc Annual Report 2007 |
| Strategy | |
Innovative tariffs delivering
market leading performance in Spain Market leader in business services
in the UK |
the year by around 4 percentage points to 46%. Key success factors have been customer focused propositions, in particular tariffs for small and medium sized businesses, as well as mobile data products such as 3G broadband USB modems and mobile connect data cards (where Vodafone has 55% market share), and mobile email solutions such as BlackBerry® from Vodafone. Vodafone Passport |
summer 2005. Around 50% of all roaming minutes in Europe are now on Vodafone Passport. Cost reduction |
Outsourcing Purchasing |
|||||
The internet on your mobile Part of the Group’s total communications strategy is to develop products and services that enable customers to use the internet on their mobiles in much the same way as they use it on their PC. In order to do this, the Group has |
 |
partnered with some of the most significant internet companies to mobilise their services in a way that is seamless to customers. Driving usage in the home
|
Delivering DSL Arcor is the leading alternative fixed line provider in Germany, with 2.1 million DSL customers and revenue growth of 10% for the year. Arcor is also enabling Vodafone Germany to offer DSL services to its mobile customers as well as providing a centre of excellence for DSL for the Group. |
|||||
Turkey: Successful rebranding
to Vodafone |
South Africa: Driving growth in non-voice revenue Non-voice revenue increased by 33% this year, driven by both messaging and data services, and now represents over 8% of service revenue. Increasing 3G and HSDPA network coverage is enabling a wider data offering to customers, such as the Vodafone Mobile Connect card and the Vodafone Mobile Connect USB modem, and delivering a fast and reliable mobile alternative to fixed-line connectivity in South Africa where fixed line services are available to only 10% of the population. |
|||||||
| India Vodafone has gained control of a leading operator in the attractive and fast growing Indian mobile market, with already over 27 million customers and nationwide market share of around 16%. In a market of |
1.1 billion people and mobile penetration of only around 14%, the opportunity for future growth is significant. | |||||||
| Revenue growth | ||||||||
| Romania | 28% | |||||||
| Egypt | 41% | |||||||
| Turkey | 37% | |||||||
| South Africa | 22% | |||||||
| India | >50% | |||||||
| Vodafone Group Plc Annual Report 2007 | 9 |
Business Overview
Vodafone is a world leader in providing voice and data communications services for both consumer and enterprise customers, with a significant presence in Europe, the Middle East, Africa, Asia, Pacific and the United States. The Group is structured into two regions to address the different business challenges inherent in them.
At 31 March 2007, based on the registered customers of mobile communications ventures in which it had equity interests at that date, the Group had approximately 206.4 million proportionate customers.
The Company has equity interests in 25 countries, through its subsidiary undertakings, joint ventures, associated undertakings and investments. Partner Market arrangements extend the Group’s footprint to a further 38 countries.
The table on page 13 sets out a summary of the Group’s worldwide mobile operations at 31 March 2007 and venture customer growth, being growth based on 100% of the operations customer base, in the year then ended (the “2007 financial year”).
Through its mobile businesses, the Group provides a wide range of mobile communications services, including voice, text messages (“SMS”), picture messages (“MMS”) and other data services, and is continually developing and enhancing service offerings, particularly through third generation (“3G”) mobile technology which has been deployed in the majority of the Group’s operations. Services are provided to both consumers and corporate customers, through a variety of both prepaid and contract tariff arrangements.
The Group’s mobile services are currently offered over a Global System for Mobile Communications (“GSM”) network, on which a General Packet Radio Service (“GPRS”) is also provided and, in certain operations, over a Wideband Code Division Multiple Access (“W-CDMA”) 3G network. Where 3G licences have been issued, the Group has secured such licences in jurisdictions in which it operates through its subsidiary undertakings. Vodafone offered 3G services in 14 of its controlled operations at 31 March 2007.
In line with the Group’s strategy, the Group is increasingly focusing on developing total communications solutions for customers, making use of the evolving technological changes which provide a far greater choice in services, whilst maintaining a mobile centric approach, focusing on the core benefits to customers of mobility and personalisation. As part of these offerings, the Group now offers fixed broadband connectivity as part of the total communications solution in a number of markets in which it operates.
The Group has a controlling interest in a fixed line telecommunications service provider in Germany, with fixed line services in other markets typically provided using wholesale relationships with infrastructure providers.
During the year the Group was ranked number one in the 2006 Global Accountability Rating, which measures how companies have built responsible business practices, emphasising Vodafone’s commitment to Corporate and Social Responsibility.
The Company’s ordinary shares are listed on the London Stock Exchange and the Company’s ADSs are listed on the New York Stock Exchange (“NYSE”). The Company had a total market capitalisation of approximately £80 billion at 25 May 2007, making it the third largest company in the Financial Times Stock Exchange 100 (“FTSE 100”) index and the twenty second largest company in the world based on market capitalisation at that date.
The Group is managed and organised through two geographic regions – Europe and EMAPA (Eastern Europe, Middle East, Africa and Asia, Pacific and Affiliates) – with the objective of aligning operations with the Group’s strategy and focusing the Group’s businesses according to different market and customer requirements.
In addition, there are a number of central functions, which are referred to as Common Functions, which provide services to the Group’s operations and allow the Group to leverage its scale and scope and manage risk effectively.
Europe
Europe
includes the Group’s principal mobile subsidiaries, located in Germany,
Spain and the UK, its joint venture in Italy, as well as the Group’s 73.7%
controlling interest in a fixed line telecommunications business in Germany.
Other businesses in the European region comprise the
Group’s other subsidiaries in this geographic area, being Albania, Greece,
Ireland, Malta, Netherlands and Portugal.
The Group’s mobile subsidiaries in Europe and joint venture in Italy operate under the brand name ‘Vodafone’. The Group’s fixed line subsidiary operates as Arcor. Arcor is the second largest fixed line telecommunications provider in Germany and offers its customers a range of services for voice and data transfer, based on its own Germany-wide networks, with a focus on direct access based broadband and internet protocol enabled virtual private network (“IP-VPN”) products.
The mobile market share of the Group’s operators in its principal markets, based on publicly available information, is estimated as follows:
| 10 | Vodafone Group Plc Annual Report 2007 |
| Business | |
EMAPA
The EMAPA region covers Eastern Europe,
Middle East, Africa and Asia, Pacific and Affiliates, and includes the Group’s
subsidiary operations in the Czech Republic, Hungary, Romania, Turkey, Egypt,
Australia and New Zealand, joint ventures in Poland, Kenya, South Africa and
Fiji, associated undertakings in France and the US and the Group’s investments
in China and India.
The Group’s subsidiaries in EMAPA operate under the ‘Vodafone’ brand. The joint ventures, associated undertakings and investments operate under the following brands: China – China Mobile; Fiji – Vodafone; France – SFR and Neuf Cegetel; India – Airtel; Kenya – Safaricom; Poland – Plus GSM; South Africa – Vodacom; US – Verizon Wireless.
On 8 May 2007, the Group completed its acquisition of a controlling interest in Hutchison Essar Limited (“Hutchison Essar”), a mobile telecommunications operator in the Indian market, which operates under the ‘Hutch’ brand.
EMAPA’s results include the results from non-mobile telecommunications businesses. The Group has a 17.91% indirect ownership in Neuf Cegetel, the leading alternative operator for fixed telecommunication services in France, offering a wide range of fixed line services to residential and business customers as well as special corporate services ranging from internet and customer relations management to internet and intranet hosting services. The Group also has a direct and indirect interest constituting in aggregate a 9.99% ownership in Bharti Airtel, an Indian based mobile and fixed line telecommunications operation with three strategic business units, mobile services, broadband and telephone services and enterprise services. In conjunction with the acquisition of Hutchison Essar Limited, a Bharti Group entity agreed on 9 May 2007 to acquire 5.60% of Bharti Airtel from the Group. Following the completion of this sale, the Group will continue to hold an indirect stake of 4.39% in Bharti Airtel.
The mobile market share of the Group’s operators in its most significant EMAPA markets, based on publicly available information, is estimated as follows:
| Customer market share (%) |
| At 31 December 2006 |
 |
Competition
The Group faces significant competition
in each of its geographic markets. It is subject to indirect competition from
providers of other communications services in the domestic markets in which
it operates in addition to direct competition from existing mobile communications
network operators and mobile virtual network operators (“MVNOs”)
who do not operate a mobile telecommunications network. There are also new
types of competitors, such as fixed line operators offering combined fixed
and mobile service offerings, and internet based companies extending their
services to include telecommunications. Competitive pressures impact the level
of customer churn, which the Group seeks to manage by a continued focus on
tariffs and customer acquisition and retention initiatives.
The Group expects that competition will continue from existing operators as well as from a number of new market entrants, including those arising following the award of new 3G licences and MVNOs. The scope of this increased competition, and the impact on the results of operations, is discussed further in “Performance – Risk Factors, Seasonality and Outlook”.
Many of Vodafone’s key markets are highly penetrated, some with penetration rates of over 100% due to a number of customers owning more than one subscriber identity module (“SIM”), which is, broadly, the Group’s basis for defining a mobile customer. The penetration rates for the Group’s operations in its principal markets, based on publicly available information, is estimated as follows:
| Estimated penetration – Europe (%) |
| At 31 December 2006 |
 |
| Estimated penetration – EMAPA (%) |
| At 31 December 2006 |
 |
| Vodafone Group Plc Annual Report 2007 | 11 |
Business Overview
continued
Partner Markets
Partner Markets are operations in which
the Group has entered into a partnership agreement with a local mobile operator,
enabling a range of Vodafone’s global products and services to be marketed
in that operator’s territory. Under the terms of these Partner Market
agreements, the Group and its partners co-operate in the development and marketing
of certain services, often under dual brand logos. The Group’s Partner
Market strategy enables the Group to implement its global services in new
territories, extend its brand reach into new markets and create additional
revenue without the need for equity investment.
Similar arrangements also exist with a number of the Group’s joint ventures, associated undertakings and investments.
The results of Partner Markets are included within Common Functions. Partnership agreements in place as at 31 March 2007, excluding those with the Group’s joint ventures, associated undertakings and investments, are as follows:
| Country | Operator | Country | Operator | |
| Argentina | CTI Móvil(1) | Iceland | Vodafone | |
| Austria | A1 | Indonesia | XL | |
| Bahrain | MTC-Vodafone | Jersey | Jersey Airtel | |
| (Bahrain) | Kuwait | MTC-Vodafone | ||
| Belgium | Proximus | Latvia | BITE Latvija | |
| Bermuda | Digicel | Lithuania | Bité | |
| Brazil | Claro(1) | Luxembourg | LUXGSM | |
| Bulgaria | Mobiltel | Malaysia | Celcom | |
| Caribbean(2) | Digicel | Mexico | Telcel(1) | |
| Chile | Claro(1) | Nicaragua | Claro(1) | |
| Colombia | Comcel(1) | Norway | TDC Song | |
| Croatia | VIPnet | Paraguay | CTI Móvil | |
| Cyprus | Cytamobile- | Paraguay(1) | ||
| Vodafone | Peru | Claro Peru(1) | ||
| Denmark | TDC Mobil | Samoa | Digicel | |
| Ecuador | Porta(1) | Singapore | Mobile One | |
| El Salvador | Claro(1) | Solvenia | Si.mobile-vodafone | |
| Estonia | Elisa | Sri Lanka | Dialog | |
| Finland | Elisa | Sweden | Telenor | |
| Guatemala | Claro(1) | Switzerland | Swisscom | |
| Honduras | Claro(1) | Uruguay | CTI Móvil Uruguay(1) | |
| Hong Kong | SmarTone-Vodafone | |||
| Notes: | |
| (1) | Partnership through America Móvil. |
| (2) | This includes the following countries: Anguilla, Antigua and Barbuda, Aruba, Barbados, Bonaire, Curacao, the Cayman Islands, Dominica, French West Indies, Grenada, Jamaica, Haiti, St Lucia, St Kitts and Nevis, St Vincent, Trinidad and Tobago, Turks and Caicos and British Guyana. |
| 12 | Vodafone Group Plc Annual Report 2007 |
| Business | |
Summary of Group mobile communications businesses
at 31 March 2007
A summary of the Group’s businesses
and significant mobile operators in each of Vodafone’s markets at 31 March
2007 is provided in the following table. Arcor’s principal competitor in
the German fixed line market is T-Com.
| Controlled | ||||||||||||||
| Venture | Registered | and jointly | ||||||||||||
| Venture | customer | proportionate | controlled | Registered | ||||||||||
| Percentage | customers(2) | growth | customers | customers | prepaid | |||||||||
| Country by region | ownership | (1) | (‘000 | ) | (% | )(3) | (‘000 | ) | (‘000 | ) | (% | )(4) | Names of other significant mobile operators(5) | |
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| EUROPE | ||||||||||||||
| Germany | 100.0 | 30,818 | 5.6 | 30,818 | 30,818 | 54.4 | e-Plus, O2 , T-Mobile | |||||||
| Italy | 76.9 | 27,366 | 13.8 | 21,034 | 21,034 | 92.0 | TIM, Wind, 3 | |||||||
| Spain | 100.0 | 14,893 | 10.1 | 14,893 | 14,893 | 45.2 | Orange, Telefónica Móviles, Yoigo | |||||||
| UK | 100.0 | 17,411 | 6.8 | 17,411 | 17,411 | 60.7 | Orange, O2 , T-Mobile, 3, Virgin Mobile | |||||||
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|
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|
|
| Other Europe | ||||||||||||||
| Albania | 99.9 | 956 | 23.7 | 955 | 956 | 96.6 | AMC | |||||||
| Greece | 99.9 | 5,057 | 12.9 | 5,051 | 5,057 | 69.2 | Cosmote, Q-Telecom, TIM | |||||||
| Ireland | 100.0 | 2,177 | 4.9 | 2,177 | 2,177 | 73.3 | Meteor, O2 , 3 | |||||||
| Malta | 100.0 | 186 | 6.4 | 186 | 186 | 89.6 | Go Mobile | |||||||
| Netherlands | 100.0 | 3,880 | (0.8 | ) | 3,880 | 3,880 | 45.3 | KPN Mobile, Orange, T-Mobile, Telfort | (6) | |||||
| Portugal | 100.0 | 4,751 | 11.1 | 4,751 | 4,751 | 79.0 | Optimus(7), TMN(7) | |||||||
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|
|
|
|
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|
|
| Other Europe total | 17,007 | 8.4 | 17,000 | 17,007 | 68.8 | |||||||||
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|
|
|
|
|
|
|
|
| Europe total | 107,495 | 8.8 | 101,156 | 101,163 | 66.0 | |||||||||
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|
| EMAPA | ||||||||||||||
| Eastern Europe | ||||||||||||||
| Czech Republic | 100.0 | 2,475 | 11.8 | 2,475 | 2,475 | 47.5 | T-Mobile, Telefonica O2 | |||||||
| Hungary | 100.0 | 2,163 | 4.8 | 2,163 | 2,163 | 61.1 | Pannon GSM, T-Mobile | |||||||
| Poland | 19.6 | 12,661 | 29.5 | 2,483 | 2,483 | 59.8 | Orange, ERA | |||||||
| Romania | 100.0 | 7,954 | 24.6 | 7,954 | 7,954 | 66.2 | Orange, Cosmote, Zapp | |||||||
| Turkey | 100.0 | 13,900 | – | 13,900 | 13,900 | 90.1 | Turkcell, Avea | |||||||
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|
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|
|
|
| Eastern Europe total | 39,153 | 91.6 | 28,975 | 28,975 | 71.2 | |||||||||
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|
| Middle East, Africa, Asia | ||||||||||||||
| Egypt | 54.9 | 9,652 | 45.9 | 5,299 | 9,652 | 93.8 | MobiNil | (8) | ||||||
| Kenya | 35.0 | 6,082 | 54.2 | 2,129 | 2,433 | 98.5 | Celtel | (9) | ||||||
| South Africa(10) | 50.0 | 30,149 | 28.2 | 13,835 | (11) | 15,075 | 89.4 | Cell C, MTN, Celtel, DRC | ||||||
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|
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|
|
| Middle East, Africa, Asia total | 45,883 | 34.6 | 21,263 | 27,160 | 91.5 | |||||||||
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| Pacific | ||||||||||||||
| Australia | 100.0 | 3,367 | 6.0 | 3,367 | 3,367 | 73.6 | Optus, Telstra, 3 | |||||||
| Fiji | 49.0 | 285 | 38.2 | 139 | 139 | 95.3 | – | |||||||
| New Zealand | 100.0 | 2,244 | 8.5 | 2,244 | 2,244 | 75.8 | Telecom New Zealand | |||||||
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| Pacific total | 5,896 | 8.2 | 5,750 | 5,750 | 75.4 | |||||||||
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| Associates and investments | ||||||||||||||
| US | 45.0 | 60,716 | 14.5 | 27,322 | – | – | National operators(12): Cingular, | |||||||
| Sprint Nextel, T-Mobile | ||||||||||||||
| China | 3.3 | 316,120 | 21.3 | 10,337 | – | – | China Netcom, China Telecom, | |||||||
| China Unicom | ||||||||||||||
| France | 44.0 | 17,881 | 3.5 | 7,876 | – | – | Bouygues Telecom, Orange | |||||||
| India(13) | 9.99 | 37,141 | 89.7 | 3,714 | – | – | Hutch, Idea, BSNL/MTNL, | |||||||
| Reliance Infocom, Tata Teleservices | ||||||||||||||
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|
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|
|
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|
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|
|
| Associates and investments total | 431,858 | 20.2 | 49,249 | – | – | |||||||||
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| EMAPA total | 522,790 | 24.7 | 105,237 | 61,885 | 81.7 | |||||||||
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|
|
| Group total | 630,285 | 21.7 | 206,393 | 163,048 | 73.2 | |||||||||
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| Notes: | |
| (1) | All ownership percentages are stated as at 31 March 2007 and exclude options, warrants or other rights or obligations of the Group to increase or decrease ownership in any venture as detailed in “Performance – Financial Position and Resources”. Ownership interests have been rounded to the nearest tenth of one percent, with the exception of India which has been rounded down to the nearest hundredth of one percent. |
| (2) | See page 159 for a definition of a customer. |
| (3) | Venture customer growth is for the year to 31 March 2007 and is calculated based on 100% of the businesses customer base. |
| (4) | Prepaid customer percentages are calculated on a venture basis at 31 March 2007. |
| (5) | Includes significant MVNOs which do not operate a mobile telecommunications network. |
| (6) | Telfort was acquired by KPN Mobile during the 2006 financial year but continues to operate its own network. |
| (7) | The competition authority released a draft decision during the year indicating that it will not oppose the potential merger of Optimus and TMN. |
| (8) | The Egyptian Government awarded a third licence during the year. Etisalat launched commercial services on 1 May 2007. |
| (9) | The Kenyan Government has awarded a third licence but the operator has not yet commenced service. |
| (10) | Customers in South Africa refers to the Group’s interests in Vodacom Group (Pty) Limited and includes customers in South Africa, the Democratic Republic of Congo, Lesotho, Mozambique and Tanzania. |
| (11) | The Group’s proportionate customer base in South Africa has been adjusted for its proportionate ownership of their customer base across all their network interests of approximately 91.8% at 31 March 2007. |
| (12) | This is not a full list of US network operators. In the United States, in addition to the national operators shown, there are several regional and numerous local operators. |
| (13) | The Group does not have any jointly controlled customers in India following the change in consolidation status of Bharti Airtel from a joint venture to an investment on 11 February 2007. |
| Vodafone Group Plc Annual Report 2007 | 13 |
Business Overview
continued
What We Offer Our Customers
Vodafone offers a wide variety of products and services to its customers. Traditionally, this has been through the provision of voice services allowing customers to make and receive calls whilst at home and abroad. Messaging services are also offered which allow customers to send and receive SMS and MMS messages and, more recently, email and instant messaging services have been provided in a number of the Group’s operations.
Various data services are now provided in many of the Group’s operations, allowing customers to access internet services, watch mobile TV and download games, ringtones, music and other content onto their mobile phones, while Vodafone Mobile Connect data cards allow people to access the internet, corporate intranets and their emails whilst on the move using their notebooks. During the current financial year, the Group has been executing on its total communications strategy through fixed location based services, enhanced mobile data and internet services, and DSL offerings.
 |
Voice services
Voice services continue to make up the
largest portion of the Group’s revenue. The Group has undertaken a wide
range of activities to stimulate growth in voice usage in the past year. These
activities range from improvements of basic tariff designs to launching differentiated
voice offerings such as Vodafone At Home, which is described in more detail
below.
Voice minutes usage growth for the Group’s principal mobile markets(1)
 |
| Note: | |
| (1) | Total statutory voice minutes per year for Germany, Italy, Spain and UK. |
A continuing increase in the level of competition and further pressure on voice prices in the Western European markets have challenged the Group to be innovative in ways to deliver more value for money to customers. By introducing voice offerings that enable customers to significantly increase their usage whilst only having to commit to a small incremental fee, the Group has strengthened the role of the mobile as a primary method of telecommunication.
Customers now have more freedom to use their mobile in ways that offer them more value depending on their particular communication needs. Differentiated, targeted tariffs launched in local markets include offers such as closed user group calling for business customers and designated free numbers or family offers for consumer customers. The launch of new, low-end contract offers has unlocked increased voice usage through lower rates per minute.
In emerging markets the Group has seen the positive development of voice usage, which is partly driven by economic growth and is partly the result of providing mobile communication to a wider population through improved entry level offers. The majority of the Group’s customers in these regions use prepaid services. In order to deliver more value to customers, the Group has offered different promotions that reward frequent or high credit top-ups. In emerging markets with limited fixed infrastructure, mobile phones are often the only telecommunications option. Here the Group seeks to continue to improve its service offerings, making services more broadly available and encouraging greater use.
Fixed location
based services
The Group is delivering on
customers’ total communications needs and driving greater voice usage
through offering integrated communications services.
Vodafone At Home
Vodafone At Home comprises a range
of offers designed to introduce Vodafone into the household as a total communications
provider. Vodafone At Home voice propositions offer customers the opportunity
to satisfy their communication needs through one operator and with a single
device.
Vodafone At Home voice offerings include zonal tariff and fixed line telephony and had 3.25 million customers as at 31 March 2007. With a zonal tariff the customer can make calls from a defined Vodafone At Home geographical area to fixed line numbers and, depending on the offer, other destinations (for example on Vodafone mobile networks), at rates similar to fixed line providers. In addition, the customers obtain a fixed line number to enable them to receive incoming calls when within the Vodafone At Home geographical area. At 31 March 2007, zonal tariffs had been launched in five markets – Germany, Italy, France, Hungary and Portugal.
Fixed line telephony offers a customer traditional fixed line calls via public switched telephone networks (“PSTN”). At 31 March 2007, this offer had been launched in two markets; in the UK as part of the DSL offering and in New Zealand.
Vodafone Office
Vodafone Office is the umbrella
name for a series of products and services designed to meet all our business
customers’ communications needs.
Vodafone Wireless Office provides companies the opportunity to reduce their number of fixed desk phones, facilitating the transfer of voice minutes from the fixed to the mobile network. The solution includes a closed user group tariff, allowing employees to call each other for a flat monthly fee. In three markets, Germany, Spain and Portugal, the offer has been expanded to include location-based office-zone charging, giving preferential rates when calling from an office location. Additionally, in these markets, geographic numbers have been introduced, enabling further fixed mobile substitution.
At 31 March 2007, Vodafone Wireless Office was available in 14 markets and had over two million customers.
| 14 | Vodafone Group Plc Annual Report 2007 |
| Business | |
Voice roaming
When travelling abroad, roaming allows
mobile phone users to make and receive calls using a mobile network in the country
they are visiting. The Group continued to expand its roaming coverage and services
during the 2007 financial year. The focus was to provide reduced, clearer and
easier to understand prices to our customers under the Vodafone Travel Promise
roaming campaign launched in May 2005.
On 8 May 2006, the Group announced that by April 2007, when compared to the period from June to August 2005, average European roaming voice cost for Vodafone customers would be cut by at least 40%. This has been achieved and is expected to benefit over 30 million Vodafone customers who roam every year.
During the year, commercial management of wholesale roaming relationships with the Group’s main roaming partners has resulted in a number of important wholesale discount agreements. These provide cost structures that support the development of our retail propositions, promote the mutual development of roaming services with our Partner Markets and deliver significant cost savings as well as securing revenue from the customers of Partner Market networks using Vodafone’s networks. The cost per minute to Vodafone is now 45 eurocents or lower for more than 90% of Vodafone’s European traffic.
Managed roaming is also now operating in 13 markets. This network technology automatically directs Vodafone customers to the Vodafone networks or networks of Partner Markets, delivering a strong Vodafone customer experience and allowing the Group to benefit from an improved cost structure.
Vodafone Passport
The success of Vodafone Passport
continued throughout the year and, at 31 March 2007, the service had attracted
12.7 million customers across 17 markets.
Vodafone Passport enables customers to “take their home tariff abroad”, offering greater price transparency and certainty to customers when using roaming services abroad. Whilst abroad, customers can make calls using their domestic tariff, in some cases including free minute bundles, and receive calls at no charge – for a one-off connection fee per call.
Customer usage patterns continue to show that, on average, Vodafone Passport customers both talk more and pay less per call when abroad.
Messaging services
All of the Group’s mobile operations
offer messaging services, which allow customers to send and receive messages
using mobile handsets and various other devices. Messaging usage grew 34.0%
in the year to 31 March 2007 and was driven by increased customer activity,
due to the network effect of a larger user community, and a shift from price
per message to bundled fees, a fixed price for a specified number of messages.
MMS, which offers customers the ability to send and receive multiple media,
such as pictures, music, sound, video and text, to and from other compatible
devices is also available in all Group mobile operations. MMS has enjoyed
strong revenue growth in the 2007 financial year across the Group through
improved handset camera capabilities.
SMS usage growth for the Group’s principal mobile markets(1)
 |
| Note: | |
| (1) | Total SMSs (billions) sent per year for Germany, Italy, Spain and UK. |
Data services
The Group offers a number of products
and services to enhance customers’ access to data services, including Vodafone
live! for consumers, as well as a suite of products for business users consisting
of Vodafone Mobile Connect data cards, internet based email solutions and Vodafone
Office.
Vodafone live!
Vodafone live!, the Group’s
content and internet services proposition, has been launched in four additional
markets since 31 March 2006, Czech Republic, Romania, Turkey and Bulgaria, bringing
the total number of countries in which Vodafone live! is offered to 28.
Vodafone has continued to develop the Vodafone live! offering by improving the handset user experience, making it faster and easier to find content and lowering barriers to regular use through more transparent and better value tariffs. The design of the Vodafone live! portal, through which customers can access a range of online services including games, ringtones, news, sports and information, is being continually enhanced to provide richer content and to make it easier for customers to find and purchase content.
During the 2007 financial year, 18 new 2.5G phones were added to the Vodafone live! portfolio, with a sustained emphasis on exclusive and customised devices.
Vodafone live! with
3G
Vodafone live! with 3G is now
available in 21 markets, including launches in Hungary, Malta, Romania and Bulgaria
in the 2007 financial year. This enhanced version of the proposition delivers
all the content and portal services of 2.5G, with richer media services, such
as music on demand and mobile TV, enabled by the faster network capabilities
of 3G.
In addition, 18 of these markets with Vodafone live! with 3G have now deployed the even faster capabilities of 3G Broadband/HSDPA. At 31 March 2007, there were 15.9 million devices registered on the controlled and jointly controlled networks capable of accessing the Vodafone live! with 3G portal.
During the 2007 financial year, 30 new 3G phones were added to the Vodafone live! portfolio. The latest 3G devices are now similar in design to 2.5G handsets and have improved battery performance, thereby overcoming barriers that were experienced by earlier phone generations. Supported by significantly lowered entry level pricing and exclusive devices from all major vendors, about 30% of Vodafone live! gross additions in Europe are now connected on 3G devices.
Vodafone has continued to improve offerings available by developing further insights into customer needs around TV, music and mobile internet. For example, an improved user interface has been developed for the Mobile TV service, delivering improved channel switching and navigation. This was first deployed in Vodafone Germany in October 2006 and is being rolled out to other Vodafone networks. Vodafone Italy launched Vodafone’s first mobile broadcast TV service using DVB-H technology and spectrum in December 2006. Vodafone is continuing to work with major international and national media brands to grow the existing market through breadth of appeal and prove the concepts of future revenue streams such as video on demand, interactivity and advertising-funding. Key partners include Time Warner, News Corp, NBC, Universal and Sony. Content from all of these companies complements national content brands.
The Vodafone live! with 3G service also supports full track music downloads, which allow customers to use their phone to listen to music, choosing from a catalogue of more than 750,000 music tracks. Vodafone has secured music from some of the world’s greatest artists through agreements with Sony BMG Music Entertainment, EMI, Universal Music, Warner Music and other independent record labels. Key ease of use improvements during this financial year included artist and title search and artist’s pages, enabling full tracks, ringtones, video clips and other related items to be found together.
| Vodafone Group Plc Annual Report 2007 | 15 |
Business Overview
continued
Following on from the mobile internet search deal signed with Google in February 2006, Vodafone announced in February 2007 a number of important collaborations to bring the benefits of key internet brands to the mobile. The collaboration with eBay, MySpace and Google Maps will enable integrated applications on to customers’ phones for an easy and secure user experience. An agreement with YouTube will also allow customers to view a daily selection of new videos, forward links of their favourites, search across multiple categories and upload their own videos from their mobiles.
In addition, Vodafone is supporting customers’ access to their internet messaging services via their mobiles with the introduction of Vodafone Consumer Push Email. This service was first made commercially available in Portugal in March 2007. The service offers customers easy mobile access to their email accounts held in both global, such as Microsoft MSN and AOL, and local email providers.
In February 2007, Vodafone announced an agreement with Yahoo! and Microsoft to provide direct access to their instant messaging services from the mobile and the PC.
Vodafone Mobile Connect
The Vodafone Mobile Connect data card provides
simple and secure access to existing business systems such as email, corporate
applications, company intranets and the internet for customers on the move, and
is available through a selection of distribution channels. The Vodafone Mobile
Connect data card based on 2.5G technology is available in eight markets, with
33 markets now offering the service on 3G technology. Additionally, the Vodafone
Mobile Connect 3G broadband data card offers enhanced download speeds of up to
3.6 Mbps by utilising HSDPA technology and has been launched in 26 markets.
Vodafone has also entered into exclusive partnerships with Acer, Dell, HP and Lenovo across multiple markets. These companies launched a range of builtin 3G broadband connectivity notebooks (with a Vodafone SIM built-in at point of manufacture) supporting HSDPA technology. Additionally, Vodafone launched the Mobile Connect USB Modem, an innovative, compact and easy to use plug and play device. Vodafone also released an updated version of its Vodafone Mobile Connect software that supports the Microsoft Vista operating system. These products provide greater choice and connectivity options to our customers for high speed mobile working. At 31 March 2007, there were 1.5 million registered Vodafone Mobile Connect data cards in the Group’s controlled and jointly controlled markets.
Mobile applications
In addition to the wireless enablement of notebook
computers, there is an increasing demand for handheld solutions that allow real-time
access to email, calendar, contact and other applications.
Vodafone Business Email, Windows Mobile Email and BlackBerry from Vodafone provide business customers, ranging from small start-up companies to multinational corporates, with wireless access to their enterprise and internet based email solutions. Vodafone Business Email and BlackBerry from Vodafone offerings are now available in 36 markets and at 31 March 2007 were supported by 25 global devices and a variety of local devices in the controlled and jointly controlled markets.
There were one million Vodafone email customers in the Group’s controlled and jointly controlled markets as at 31 March 2007.
Data roaming
Vodafone has continued to improve the simplicity,
price predictability and value for money offered to data services customers.
For Vodafone Mobile Connect 3G broadband data card users, Vodafone complemented
the monthly roaming bundle launched in 2005 with a daily roaming tariff appealing
to less-frequent international travellers. At 31 March 2007, this tariff was
available in three controlled markets. On 14 March 2007, Vodafone announced that
the daily tariff
would be reduced by over 50% by July 2007.
Vodafone has successfully implemented data wholesale tariff structures with more than 15 Partner Market networks, enabling the launch of new data roaming propositions. Vodafone also announced on 14 March 2007 that it would make lower data roaming wholesale rates available to all other European operators on a reciprocal basis.
DSL and other services
In May 2006, Vodafone announced its intention to enter the fixed broadband space in order to provide customers with data solutions to meet their total communication needs. DSL offered as part of the Vodafone At Home
package is now available in five markets, Germany, Italy, UK, Malta and New Zealand, with further markets intended to be launched throughout 2007. Current DSL offers are provided by Arcor (Germany) and ihug (New Zealand), as well as in partnership
with BT (UK), Fastweb (Italy) and Melita (Malta).
Vodafone Office also includes fixed data DSL offerings. At 31 March 2007, DSL was available to business customers in five markets – UK, Spain, Netherlands, Portugal and Egypt.
With the launch of the Vodafone Applications Service in the UK and Spain, Vodafone has also taken a further step towards making mobile applications accessible to businesses of all sizes. This service quickly and efficiently connects existing business applications to mobile handsets, allowing users to access and exchange information when out of the office.
The Group has been extending its business model to generate revenue from mobile advertising by partnering with advertising specialists in individual markets. An agreement with Yahoo! has been operational since March 2007 in the UK.
| 16 | Vodafone Group Plc Annual Report 2007 |
| Business | |
Summary of Group products and services
The
following table summarises the availability of the Group’s most significant
products and services as at 31 March 2007 in the markets in which they are
available.
| Vodafone live! | Vodafone live! with 3G | Vodafone Mobile Connect GPRS data card | Vodafone Mobile Connect 3G/GPRS data card | BlackBerry from Vodafone Vodafone Push Email | Vodafone Wireless Office | Vodafone Passport | Vodafone Consumer Push Email | Vodafone At Home (Zonal) | Vodafone AT Home (fixed line telephony) | Vodafone At Home (DSL) | |
| Subsidiaries | |||||||||||
| Germany | • | • | • | • | • | • | • | • | |||
| Spain | • | • | • | • | • | • | |||||
| UK | • | • | • | • | • | • | • | • | |||
| Albania | • | • | • | ||||||||
| Australia | • | • | • | • | • | ||||||
| Czech | • | • | |||||||||
| Egypt | • | • | • | • | |||||||
| Greece | • | • | • | • | • | • | |||||
| Hungary | • | • | • | • | • | • | • | ||||
| Ireland | • | • | • | • | • | • | |||||
| Malta | • | • | • | • | • | • | |||||
| Netherlands | • | • | • | • | • | • | |||||
| New Zealand | • | • | • | • | • | • | • | ||||
| Portugal | • | • | • | • | • | • | • | • | |||
| Romania | • | • | • | • | • | ||||||
| Turkey | • | ||||||||||
| Joint Ventures | |||||||||||
| Fiji | • | • | |||||||||
| Italy | • | • | • | • | • | • | • | • | |||
| South Africa | • | • | • | • | • | ||||||
| Subtotal | 17 | 14 | 4 | 14 | 17 | 12 | 13 | 1 | 4 | 2 | 5 |
| Associate | |||||||||||
| France | • | • | • | • | • | • | • | • | |||
| Partner Markets | |||||||||||
| Austria | • | • | • | • | |||||||
| Bahrain | • | • | |||||||||
| Belgium | • | • | • | • | • | ||||||
| Bulgaria | • | • | • | • | |||||||
| Croatia | • | • | • | • | |||||||
| Cyprus | • | • | |||||||||
| Denmark | • | • | |||||||||
| Estonia | • | • | • | ||||||||
| Finland | • | • | |||||||||
| Hong Kong | • | • | |||||||||
| Iceland | • | • | • | • | |||||||
| Indonesia | • | ||||||||||
| Kuwait | • | ||||||||||
| Latvia | • | ||||||||||
| Lithuania | • | ||||||||||
| Luxembourg | • | • | • | ||||||||
| Malaysia | • | • | |||||||||
| Norway | • | ||||||||||
| Singapore | • | • | |||||||||
| Slovenia | • | • | • | ||||||||
| Sri Lanka | • | ||||||||||
| Sweden | • | • | • | • | • | ||||||
| Switzerland | • | • | • | • | |||||||
| Total | 28 | 21 | 8 | 33 | 36 | 14 | 17 | 1 | 5 | 2 | 5 |
| Key: | |
| • | Available throughout the 2007 financial year |
| • | Launched in the 2007 financial year |
Products and services are available directly to both consumer and business customers in the majority of markets under the Vodafone brand. In the 2007 financial year, the Group continued to focus on social products with the establishment of a new social investment fund, which has been formed to provide resources for initiatives that can demonstrate high social values.
Distribution
The Group distributes its products and services through a wide variety of direct and indirect channels, with different approaches used in the consumer and business sectors. Main developments in distribution are within
the area of IT resellers, distributors and MVNOs.
Over 1,100 stores are directly owned and managed by Vodafone, with an additional 5,500 Vodafone branded stores. In addition, local websites offer products and services online, local sales forces are in place to discuss terms with business customers and call centres are available to support customers.
The extent of indirect distribution varies between markets but may include using third party service providers, independent dealers, distributors and retailers.
Vodafone’s engagement with IT resellers and distributors continued to grow throughout the 2007 financial year. The partner marketing programme has attracted over 5,000 resellers across eight countries, providing sales support and training. This engagement with the IT channel enables Vodafone to sell to small and medium enterprises as well as providing a key platform to support the sales of the built-in 3G broadband connectivity notebooks from our PC partners, including Acer, Dell, HP and Lenovo.
The last few years have seen the growth of MVNOs who buy access to existing networks and re-sell that access to customers under a different brand name and proposition. Where appropriate, Vodafone seeks to enter mutually profitable relationships with MVNO partners as an additional route to market.
Vodafone Global Enterprise
Vodafone’s Global Enterprise unit, previously
the multinational corporate business unit, is now entering its third year of
operation and continues to build its capability, providing global enterprises
with consistent levels of service, support and commercial terms worldwide.
Vodafone has enjoyed continued success with these customers and delivered strong
growth in this segment.
During the last year, this business unit has developed a number of services and solutions specifically for global enterprises. The device portfolio offers a consistent range of mobile devices at different price points across multiple markets. Mobile Spend Management is an analysis and reporting tool which allows global administrators to track and control their mobile communications spend. The master services agreement has been simplified and is now available across 12 countries.
To ensure the Group is best placed to continually meet the needs of this customer segment, Vodafone has brought full ownership and control for the management of these customers to the business unit.
Handsets
Vodafone pushed 3G into the mass market with
the support of one exclusive mobile phone per high value brand supplier: the
Nokia 6234, Samsung ZV40, SEMC V630i and Motorola V1100 in the consumer segment
and the Palm Treo 750v for the business market. Approximately one third of the
Vodafone live! sales volume was driven by devices that are exclusively available
through Vodafone.
| Vodafone Group Plc Annual Report 2007 | 17 |
Business Overview
continued
The launch of the Vodafone McLaren Mercedes F1 team was supported with three special edition Vodafone McLaren branded phones.
Vodafone is also leading the way into 3G broadband, with six HSDPA handsets launched. 3G Broadband PC connectivity was supported by a full range of data card products and by 3G modules that embed 3G connectivity in the laptops of several leading Original Equipment Manufacturers.
In October 2006, the VF 710, the first own branded 3G consumer phone, was launched in all European markets and since then over half a million units have been sold.
Vodafone has also announced several collaboration and partnership agreements with the objective to consolidate the software platforms for mobile devices around three major platforms – Nokia S60, Microsoft Windows Mobile and a new Linux platform that is anticipated to be developed through the LiMo Foundation with NTT DoCoMo, Motorola, NEC, Panasonic, Samsung and Vodafone as founding members. This strategic programme is expected to deliver long term cost savings and improve the time to market for new service innovations to be integrated on a mobile device.
Marketing and brand
Brand and customer communications
Vodafone has continued to focus on delivering
a superior, consistent and differentiated customer experience through its brand
and communications activities. The Vodafone operating companies in Romania and
Turkey migrated to a single Vodafone brand during the year, and Iceland was the
first franchise partner market to move to a single Vodafone brand.
Vodafone’s brand purpose of 'helping our customers make the most of their time' has been embedded in the organisation via the ongoing brand engagement programme which brings the brand to life for Vodafone employees, ensuring that they can do the same for customers. Externally, the brand idea has been introduced to customers through the launch of the ‘Make the Most of Now’ communications campaign in all 18 of Vodafone’s branded markets.
Sponsorships
Vodafone’s global sponsorship strategy
has evolved in the past year to better support the changing needs of consumers
and the competitive business environment. The majority of global sponsorship
investment continues to focus on Formula 1 and football because these sports
are best positioned to meet Vodafone’s
specific business needs.
In July 2006, Vodafone's three year sponsorship of the UEFA Champions League commenced. This sponsorship enables Vodafone to build a credible association with the world's most popular sport in a manner which is relevant to the business and brand objectives.
In January 2007, Vodafone became the title partner of the Vodafone McLaren Mercedes Formula 1 team. Vodafone will be able to use the partnership to deliver opportunities which will engage customers and project a consistent brand positioning to a global audience.
Globally, Vodafone’s sponsorships build brand awareness, differentiate Vodafone from the competition and deliver revenue, driving opportunities through both business and consumer channels. The Group’s individual operating countries benefit from a variety of marketing propositions which are delivered through all aspects of their marketing mix.
Music continues to play an important role in our business. Many of the local Vodafone operating companies already deliver highly successful music sponsorships.
Customer strategy and management
Vodafone continues to use a customer management
system called ‘customer delight’ to measure customer satisfaction in the Group’s
controlled markets at a local and global level. This is a proprietary diagnostic
system which tracks customer satisfaction across all the points of interaction
with Vodafone and identifies the drivers of customer delight and their relative
impact. This information is used to identify any areas for improvement and highlight
which areas to focus on.
Social products
Vodafone has continued making mobile services
more accessible to people with special communication needs and has undertaken
significant research to better understand the levels of exclusion relating to
use of mobile
technology, which is helping to inform relevant areas of the business.
One of the initiatives that has benefited from the social investment fund is M-PESA, an innovative mobile micro-finance service now on trial in Kenya. This service, run in conjunction with a local bank and Vodafone’s Kenyan joint venture, Safaricom, enables customers to move money in and out of accounts, between other customers and to withdraw cash, all using secure mobile messaging. For further information on this see the “Governance –Corporate Responsibility and Environmental Issues” section on pages 75 to 77.
Content standards
Vodafone has continued the rollout of the off-net
content filter. The access control programme demonstrates Vodafone's commitment
to deliver content responsibly and provides the capability for parents to restrict
access to content that may be inappropriate for younger users. Ensuring that
the mobile needs of parents and their children are satisfied will remain a priority
during the 2008 financial year.
As new media channels evolve, a number of Vodafone initiatives are designed to ensure protection for our customers from inappropriate content, contact and commercialism. These include providing supporting guidelines around the marketing of content to customers, social networking/Web 2.0 services, mobile advertising and the continued development of parental controls requirements to meet new technological requirements.
| 18 | Vodafone Group Plc Annual Report 2007 |
| Business | |
Our Technology and Resources
Vodafone’s key technologies and resources encompass the telecommunication licences it holds, the related mobile network infrastructure and the approximately 66,000 people Vodafone employs worldwide. These key technologies and resources enable the Group to operate mobile networks in 21 controlled and jointly controlled markets around the world.
Licences
The
Group is dependent on the licences it holds to operate mobile telecommunications
services. Further detail on the issue and regulation of licences can be found
in “Business – Regulation”. The table
below summarises the significant licences held by the Group’s mobile operating subsidiaries and the Group’s
joint venture in Italy at 31 March 2007.
| Country by | Licence | Licence expiry | Date of commencement |
| region | type(1) | date | of commercial service |
| Europe | |||
| Germany | 2G | December 2009(2) | June 1992 |
| 3G | December 2020 | February 2004 | |
| Italy | 2G | January 2015 | December 1995 |
| 3G | December 2021 | February 2004 | |
| Spain | 2G | July 2023(3) | October 1995 |
| 3G | April 2020 | February 2004 | |
| UK | 2G | See note(4) | December 1991 |
| 3G | December 2021 | February 2004 | |
| Albania | 2G | June 2016 | August 2001 |
| Greece | 2G | September 2012 | July 1993 |
| 3G | August 2021 | July 2004 | |
| Ireland | 2G | May 2011(5) | March 1993 |
| 3G | October 2022 | May 2003 | |
| Malta | 2G | September 2010 | July 1997 |
| 3G | August 2020 | August 2006 | |
| Netherlands | 2G | March 2013 | September 1995 |
| 3G | December 2016 | February 2004 | |
| Portugal | 2G | October 2021 | October 1992 |
| 3G | January 2016 | February 2004(6) | |
| EMAPA | |||
| Australia | 2G | See note(7) | September 1993 |
| 3G | October 2017 | October 2005 | |
| Czech | 2G | January 2021 | March 2000 |
| Republic | 3G | February 2025 | See note(8) |
| Egypt | 2G | January 2022(9) | November 1998 |
| 3G | January 2022 | May 2007 | |
| Hungary | 2G | July 2014(10) | November 1999 |
| 3G | December 2019 | December 2005 | |
| New Zealand | 2G | See note(11) | July 1993 |
| 3G | March 2021(11) | August 2005 | |
| Romania | 2G | December 2011 | April 1997 |
| 3G | March 2020 | April 2005 | |
| Turkey | 2G | April 2023 | April 1998 |
| Notes: | |
| (1) | All 2G networks are of a GSM/GPRS network type. All 3G networks are of a W-CDMA network type. |
| (2) | On 15 May 2007, the Group secured a seven year extension of its GSM licence in Germany to |
| December 2016. | |
| (3) | Date relates to 1800MHz spectrum licence. Vodafone Spain also has a separate 900MHz |
| spectrum licence which expires in February 2020. | |
| (4) | Indefinite licence with a one year notice of revocation. |
| (5) | Date refers to 900MHz licence. Vodafone Ireland also has a separate 1800MHz spectrum |
| licence which expires in December 2015. | |
| (6) | Portugal launched the Vodafone Mobile Connect 3G/GPRS data card in February 2004 and |
| the launch of 3G voice services took place in May 2005. | |
| (7) | Refers to a 900MHz spectrum rolling five year licence. Various licences are held for 1800MHz |
| licences, which are issued by specific regional regulators. The earliest expires in June 2013 | |
| and the latest in March 2015. | |
| (8) | Launch date to be determined. |
| (9) | Egypt extended its 2G licence for a further nine years in January 2007. |
| (10) | There is an option to extend this licence for seven years. |
| (11) | Vodafone New Zealand owns three GSM 900 licences (2x21MHz) and one GSM1800 licence |
| (2x15MHz). The GSM900 licences expire in November 2011, July 2012 and September 2021. | |
| The GSM1800 licence expires in March 2022. | |
Mobile network infrastructure
Network
infrastructure is fundamental to the Group being able to provide mobile services.
The mobile network enables the Group’s customers to place and receive voice
calls and allows the Group to provide other
services, such as text messaging.
When a voice call or data transmission is made on a mobile device, voice or data is sent from the device and transmitted by low powered radio signals to the nearest base station, which in turn is connected to the Group’s network. Each base station provides coverage over a given geographic area, often referred to as a cell. Cells can be as small as an individual building or as large as 20 miles across. Each cell is equipped with its own radio transmitter and receiver antenna. This network of cells provides, within certain limitations, coverage over the service area. When a customer using a mobile device approaches the boundary of one cell, the mobile network senses that the signal is becoming weak and automatically hands over the call to the transmission unit in the next cell into which the device is moving.
If the voice call or data transmission is intended for delivery to another device which is not on the Vodafone network, the information is delivered through a public or private fixed line telephone network or the internet.
In a second generation (“2G”) network, each cell contains a base station using a number of radio frequencies or channels. A group of base stations is connected to a base station controller, which in turn is connected to a mobile switching centre and then via a gateway support node for access to a fixed line network or the internet.
In a 3G network, voice or data traffic is passed through a node B, being similar to a base station in a 2G network, to a radio network controller which is then connected to a mobile switching centre, similar to a 2G network.
Base stations and node Bs form a critical element of a mobile network and an insufficient number of base stations can result in loss of service for customers. In addition, the correct deployment of the right base stations is instrumental in achieving the network quality and coverage that are crucial to customer satisfaction.
2G
Vodafone operates 2G networks in all its mobile
operating subsidiaries, through GSM networks, offering customers services such
as voice, text messaging and basic data services.
In addition, all of the Group’s controlled networks operate GPRS, often
referred to as 2.5G. GPRS allows mobile devices to be used for sending and receiving
data over an internet protocol (“IP”) based network, enabling wireless
access to data networks like the internet.
The GPRS data service offering includes internet and e-mail access, allowing the customer to be always connected at download speeds slightly below a dial-up modem. Vodafone also offers a great variety of services on its Vodafone live! portal, such as picture and video messaging, download of ringtones, news and many other services.
3G
Vodafone’s 3G networks, operating the W-CDMA
standard, provide customers with mobile broadband data access allowing data download
speeds of up to 384 kilobits per second (“kbps”), which is up to seven
times faster than a dial-up modem. Vodafone has expanded its service offering
on 3G networks with high speed internet and e-mail access, video telephony, full
track music downloads, mobile TV and other data services, in addition to existing
voice
and data services.
The Group has secured 3G licences in all jurisdictions in which it operates through its subsidiary undertakings and in which such licences have been awarded to date, as well as in Italy through its joint venture. Vodafone expects to participate in additional 3G licence allocation procedures in other jurisdictions in which it operates where this is commercially viable. No assurances can be given that the Group will be successful in obtaining any 3G licences for which it intends to apply or bid.
| Vodafone Group Plc Annual Report 2007 | 19 |
Business Overview
continued
Roll out of the 3G network infrastructure has continued throughout the 2007 financial year across the Group’s mobile operations, including approximately £625 million expenditure on 3G network infrastructure. By the end of March 2007, over 41,000 node B’s were in operation in the Group’s controlled operations and the Group’s joint venture in Italy. In many of the Group’s markets, Vodafone has achieved the leading position on 3G coverage and quality of service.
High Speed Downlink Packet Access (“HSDPA”)
HSDPA is a wireless technology enabling data
transmission speeds of up to 3.6 megabits per second in the first phase. It allows
increased mobile data traffic, and improves the customer experience through the
availability of enhanced mobile broadband services and significantly shorter
download times.
In later phases, peak speeds up to 7.2Mbps will be available in hotspots first, with up to 14.4 Mbps achievable with later releases. This is expected to provide customers with faster access speeds than experienced on existing 3G networks. The performance figures quoted are theoretical peak rates deliverable by the technology in ideal radio conditions with no customer contention for resources.
HSDPA is enabled through the deployment of new software in the 3G radio network and expanding the processing capabilities of the node B. Significant performance benefits are achieved by using mechanisms that use the radio interface more effectively and are further adapted to ‘bursty’ packet based data traffic using IP. Vodafone Mobile Connect data cards which support HSDPA are available commercially, and compatible Vodafone live! handsets were launched in the summer of 2006.
HSDPA was launched commercially in many of the major mobile markets of the Group during the 2007 financial year. All markets are considering upgrades to serve higher bandwidths for customers as each market situation justifies.
While HSDPA focuses on downlink (network to mobile), Vodafone is also improving the data speeds in the uplink (mobile to network) to achieve speeds of up to 384kbps. HSUPA (High Speed Uplink Packet Access) is expected to further enhance the uplink speed beyond 1 megabit per second.
Employees
Vodafone employs approximately 66,000 people
worldwide, with a goal to recruit, develop and retain the most talented, motivated
people that are well aligned with the Vodafone brand essence. The Company aims
to do this by providing a productive, safe working environment, treating people
with respect and offering attractive performance based incentives and opportunities.
Training and development programmes help employees to develop their skills and
experience and
to reach their full potential, benefiting themselves and the Company.
Employee involvement
The
Board’s aim is to ensure that employees understand the Group’s strategic
goals and the mutual obligations of working in a high performing, values-based
organisation.
Vodafone’s values continue to provide a common way of behaving and are implicit in all that the Group does for and with its shareholders, customers and employees. During the year, Vodafone has built further on its employee engagement initiative through embedding the Vodafone brand, ‘Red, Rock Solid, Restless,’ into the business through all of its people practices. This has been supported by the development of a Vodafone People Strategy that provides a common goal for the experience all employees receive when joining and working for Vodafone.
The employer brand programme continues to deliver the desired change in culture of the Group to one that inspires the behaviour of employees in their interactions with customers and other stakeholders. Employee engagement with the brand is measured through a survey tool, with October 2006 results demonstrating 79% awareness of the brand’s importance to Vodafone’s success.
The Board places a high priority on effective employee communications to create a dialogue with the Group’s employees. In addition to the more traditional channels, the Group increasingly uses its own products and services, such as SMS and audio based messaging, and this year has seen the use of Vodafone TV for broader communications, including financial results and product launch communications to employees, with very positive feedback.
The Chief Executive and other members of the executive management team continue to host the “Talkabout” programme, which aims to visit each of the Group’s local operating companies every year. In the “Talkabout” sessions, the executive team use the opportunity to discuss the Group’s strategic goals with as wide an audience of Vodafone employees as possible, listening to their views and talking about the issues that matter most to them, as well as exchanging ideas about how Vodafone can serve its customers.
Vodafone’s success is driven by the passion and effort of the Group’s employees. In return, Vodafone values employees’ opinions on improving the performance of the Group. Within European subsidiaries, employee representatives meet annually with members of the executive management team in the Vodafone European Employee Consultative Council to discuss the performance and prospects of the Group and significant trans-national issues.
In October 2007, Vodafone plans to carry out its third global all employee opinion survey. In addition, the Group now conducts half yearly interim surveys on a representative sample of employees across its organisation to continue to track employee engagement on a more regular basis.
In 2006, the Group conducted two interim surveys in April and October covering all operating companies. The results showed that employees continue to be highly engaged with Vodafone. In particular, the results showed that employees now have a greater understanding of what is expected of them and receive better coaching support to improve their performance. Again, the overwhelming majority of employees are proud to work for Vodafone, understand the importance of Vodafone’s values, know the results expected of them in their jobs and have a good understanding of Vodafone’s strategic goals and priorities.
Vodafone is focused on continually improving and, as a result, continues to focus on some previously identified areas that need to be addressed through co-ordinated global and local action:
| • | To improve the Group’s understanding of the underlying customer focus issues in each market and identify improvements in the service offered. Meeting customers’ requirements remains at the heart of the business and will continue to differentiate Vodafone from our competition; and |
| • | To continue to develop practical global frameworks and guidelines to help employees effectively manage change within the business. |
| 20 | Vodafone Group Plc Annual Report 2007 |
| Business | |
In addition, Vodafone has added another specific area of focus this year:
| • | To create an environment where people are attracted to work for Vodafone and are truly engaged to grow and deliver their best efforts. This goal is supported by the rollout of the Vodafone People Strategy. During the 2008 financial year the Vodafone People Strategy will be communicated to all employees, with the ultimate goal that employee engagement levels will be in the top quartile in every market in which the Group operates. |
Employment policies
The Group’s employment
policies are consistent with the principles of the United Nations Universal Declaration
of Human Rights and the International Labour Organisation Core Conventions and
are developed to reflect local legal, cultural and employment requirements. High
standards are maintained wherever the Group operates, as Vodafone aims to ensure
that the Group is recognised as an employer of choice. Employees at all levels
and in all companies are encouraged to make the greatest possible contribution
to the Group’s success. The Group considers its employee relations to be
good.
Equal opportunities
Vodafone does not condone
unfair treatment of any kind and operates an equal opportunities policy for all
aspects of employment and advancement, regardless of race, nationality, sex,
age, marital status, disability or religious or political belief. In practice,
this means that the Group is able to select the best people available for positions
on the basis of merit and capability, making the most effective use of the talents
and experience of people in the business and providing them with the opportunity
to develop and realise their potential.
The disabled
Vodafone is conscious of the
difficulties experienced by people with disabilities. Every effort is made to
ensure ready access to the Group’s facilities and services and a range of
products has been developed for people with special needs. In addition, disabled
people are assured of full and fair consideration for all vacancies for which
they offer themselves as suitable candidates and efforts are made to meet their
special needs, particularly in relation to access and mobility. Where possible,
modifications to workplaces are made to provide access and, therefore, job opportunities
for the disabled. Every effort is made to continue the employment of people who
become disabled via the provision of additional facilities, job design and the
provision of appropriate training.
Health, safety and wellbeing
The health, safety and wellbeing
of the Group’s customers, employees and others who could be affected by
its activities are of paramount importance to Vodafone and the Group applies
rigorous standards to all its
operations.
The health and safety management in each operating company is audited annually and the results are submitted in a report for discussion by the Board. The Group’s annual global health and safety audit has been recently upgraded in line with the new health and safety management system. This online system provides improved detailed assessment and management reporting. The system, which includes global policies, standards and best practice samples, provides easy to access guidance and supports governance requirements, particularly for Vodafone businesses in developing markets.
The Vodafone People Strategy includes health, safety and wellbeing as a central part, with employee wellbeing a major focus as the business moves forward. The 2008 financial year will see Vodafone health, safety and wellbeing professionals focusing on three key initiatives to support this strategy: implementation of employee wellbeing initiatives, emphasis on communication and implementation of updated mobile phone and driving policy requirements and the continued development of group standards for the selection and evaluation of appropriately trained and qualified contractors and service providers.
Supply chain management
Handsets,
network equipment, marketing and IT services account for the majority of Vodafone’s purchases, with the bulk of these purchases from global suppliers. The Group’s Global Supply Chain Management
(“GSCM”) team is responsible for managing most of the Group’s
relationships with these suppliers.
The ongoing transformation of the supply chain organisation under one leadership and global material strategies has enabled savings across all operating companies. This is supported by a uniform savings methodology applied across all operating companies. Enablers such as eAuctions and seamless B2B applications form a vital part in leveraging the Group’s scale further.
Vodafone’s eSourcing programme continues to drive and create significant benefits for the entire organisation. Amongst its successes in the 2007 financial year, the programme has established world class benchmark prices in hardware procurement.
GSCM continues to implement best practices across the Group’s mobile operations with the aim of harmonising business processes, which will bring the benefits of further reducing procurement costs and reducing time to market.
Global suppliers are required to comply with the Group’s Code of Ethical Purchasing which sets out the labour and environmental standards the Group expects suppliers to meet. The Code is based on the Group’s values and international standards, including the Universal Declaration of Human Rights and the International Labour Organisation Conventions on Labour Standards. GSCM has implemented a consistent supplier performance management process that ensures that key suppliers are evaluated across six areas, covering aspects of financial stability, technological and commercial criteria, delivery and quality management requirements and corporate responsibility.
Consistent with GSCM’s pro-active approach to strategic sourcing, Vodafone launched the China Sourcing Centre based in Beijing in March 2007, which will act as the GSCM competency centre for low cost sourcing and emerging suppliers.
It is the Group’s policy to agree terms of transactions, including payment terms, with suppliers and it is the Group’s normal practice that payment is made accordingly. The number of days outstanding between receipt of invoices and date of payment, calculated by reference to the amount owed to suppliers at the year end as a proportion of the amounts invoiced by suppliers during the year, was 34 days (2006: 36 days) in aggregate for the Group.
Research and Development (“R&D”)
The
Group R&D function comprises an international and multicultural team for applied research in mobile and internet communications and their applications. The majority of the work of the Group’s R&D
function is undertaken through the Group’s research centres, located in Newbury, Maastricht, Munich, California and Madrid, and in an associate centre in Paris belonging to Vodafone’s associated undertaking in France, SFR. In the 2007
financial year, the R&D centre in Milan was re-absorbed into the Italian
operation and ceased to engage in research and development for the Group.
Governance is provided by the Group R&D Board, which is chaired by the Group R&D Director and consists of the chief technology officers from six of the operating subsidiaries in Europe, the heads of Business Strategy and Global Terminals and a representative from EMAPA.
| Vodafone Group Plc Annual Report 2007 | 21 |
Business Overview
continued
Group R&D works beyond the traditional established markets of Vodafone in search of technology based business opportunities. It delivers a systematic programme of demand inspired research and development in wireless and internet communications that is positioned between basic research and commercial product development. It directs Vodafone’s work with technical standards bodies and its intellectual property activities.
Typically, Group R&D works on developments that are expected to be introduced into the business in three to five years’ time. This horizon covers some significant business developments that can already be anticipated –for example, the transition of traditional telecommunications protocols to the internet protocol, the emergence of the internet as a personal communications platform and the introduction of wireless technology beyond our current generation – including disruptive radio technologies for mobilising the internet.
The emphasis of the Group R&D work programme is on providing technology analysis and a vision that can contribute directly to business decisions, enabling new applications of mobile communications, using new technology for new services and research for improving operational efficiency and quality of the Group’s networks. This is done by pioneering the adoption of new technologies, business opportunities and innovations through technology analysis, trials, invention and prototypes; by making Vodafone aware of market opportunities or threats posed by new technologies and business models, and helping the Company to exploit or resist them; by providing technology leadership by working with the industry to define and standardise the technology Vodafone uses; and by securing intellectual property and greater technology ownership for the Company.
The work of Group R&D is delivered through a portfolio of programmes and cross industry activities with a substantial number of trials, demonstrations and prototypes. All work is set in a business and social context. There is growing emphasis on work that secures intellectual property rights or can otherwise lead to Vodafone having stronger influence on the technology it will deploy in the future. In addition, Group R&D provides leadership for funding research into health and safety aspects of mobile communications and technical leadership for the Group’s spectrum strategy.
The main themes currently being researched are mobile technologies beyond the current generation, the internet as a communications platform, mobile TV and media and service enabler technology like near field communications. A number of significant wireless technology trials are underway and several internet based services have been prototyped and demonstrated within the Vodafone community. Application of mobile communications to intelligent transport systems and the digital home are also being researched.
Much of the work of Group R&D is done in collaboration with others, both within the Group and externally. The Group has established R&D collaboration with all of its traditional suppliers and is now extending this to other companies in the communications, media and internet industries. There is a programme of work with academic institutions, which includes student placements in Vodafone laboratories during summer vacations, and the Group is developing new ways in which to use the internet as a platform for research and innovation – at the forefront of this is Vodafone ßetavine, a research space on the internet. There is also a programme to capture innovation from start-up companies, particularly those based in Silicon Valley, USA, and many of those companies were introduced to the Vodafone Executive Committee and operating company CEOs at a specially hosted event in September 2006. Group R&D also continues to develop relationships with a number of universities. These relationships include sponsoring research students, collaboration in European research activities, funding specialised research centres and working with Vodafone funded chairs and research publications. This year, Group R&D again hosted an academic conference where it brought together its academic partners to consolidate its academic research programme.
The R&D programme provides the Group with long term technical policy, strategy and leadership, as well as providing technical underpinning for the Group’s public policies and government relations, and is shared with all subsidiaries of the Company and Group functions. They are able to influence the programme through working relationships that are designed to allow delivery of the results of the programme directly into the business units where they are needed.
How We DevelopedThe Company was incorporated under English law in 1984 and through a series of business transactions, including the merger with AirTouch Communications, Inc. in 1999 and the acquisition of Mannesmann AG in 2000, has become a world leader in providing voice and data communications for both consumer and enterprise customers.
The Group has continued to execute on its strategy of actively managing its portfolio to maximise returns, with recent acquisitions in the high growth markets of Romania, the Czech Republic, Turkey and India.
Vodafone began in July 1984 when it was incorporated as Racal Strategic Radio Limited (registered number 1833679). After various name changes, 20% of Racal Telecom Plc capital was offered to the public in October 1988. The Company was fully demerged from Racal Electronics Plc and became an independent company in September 1991, at which time it changed its name to Vodafone Group Plc.
Between 1991 and 2004 the Group entered into various transactions which consolidated the Group’s position in the United Kingdom and enhanced its international presence. The most significant of these transactions were as follows:
| • | The merger with AirTouch Communications, Inc. (“AirTouch”), which completed on 30 June 1999. The Company changed its name to Vodafone AirTouch Plc in June 1999. The company reverted to its former name, Vodafone Group Plc, on 28 July 2000. |
| • | The acquisition of Mannesmann AG (“Mannesmann”), which completed on 12 April 2000. Through this transaction the Group acquired subsidiaries in two of Europe’s most important markets, Germany and Italy, and increased the Group’s indirect holding in SFR, a French mobile telecommunications operator. |
| • | Over a period from June 1999 to October 2001 the Group acquired an effective interest of 69.76% in J-Phone Co. Limited. During the 2004 financial year, after various name changes and business transactions, the Group held a 69.7% interest in Vodafone K.K. and a 66.7% interest in Vodafone Holdings K.K. |
| 22 | Vodafone Group Plc Annual Report 2007 |
| Business | |
| Summary of transactions since 31 March 2004 | |
| • | 25 May 2004 – Japan: Increased effective stake in Vodafone K.K. to 98.2% and stake in Vodafone Holdings K.K. to 96.1% for £2.4 billion. |
| • | 1 October 2004 – Japan: Merger of Vodafone K.K. and Vodafone Holdings K.K. completed. The Group’s stake in the merged company was 97.7%. |
| • | 12 January 2005 – Hungary: Vodafone Hungary became a wholly owned subsidiary of the Group following various transactions throughout the 2005 financial year. |
| • | 26 January 2005 – Egypt: Disposed of 16.9% of Vodafone Egypt reducing the Group’s effective interest to 50.1%. |
| • | 11 May 2005 – France: The Group’s effective shareholding in Neuf Cegetel became 12.4% after a transaction completed by the Group’s associated undertaking SFR. |
| • | 31 May 2005 – Czech Republic and Romania: 79.0% of the share capital of MobiFon S.A. (“MobiFon”) in Romania, and 99.9% of the share capital of Oskar Mobil a.s. (“Oskar”) in the Czech Republic were acquired for $3.5 billion (£1.9 billion). In addition, the Group assumed approximately $1.0 billion (£0.6 billion) of net debt. |
| • | 18 November 2005 – India: Acquired a 5.61% interest in Bharti and on 22 December 2005 acquired a further 4.39% interest in Bharti. Total consideration for the combined 10.0% stake was Rs. 67 billion (£858 million). |
| • | 5 January 2006 – Sweden: Sold Vodafone Sweden for €970 million (£660 million). |
| • | 20 April 2006 – South Africa: Increased stake in Vodacom Group (Pty) Limited (“Vodacom”) by 15.0% to 50.0% for a consideration of ZAR15.8 billion (£1.5 billion). |
| • | 27 April 2006 – Japan: Disposed of 97.7% stake in Vodafone Japan for ¥1.42 trillion (£6.9 billion) including the repayment of intercompany debt of ¥0.16 (£0.8 billion) to SoftBank. The Group also received non-cash consideration with a fair value of approximately ¥0.23 trillion (£1.1 billion), comprised of preferred equity and a subordinated loan. SoftBank also assumed debt of approximately ¥0.13 trillion (£0.6 billion). |
| • | 24 May 2006 – Turkey: Telsim Mobil Telekomunikasyon (“Telsim”) was acquired for $4.67 billion (£2.6 billion). |
| • | 29 June 2006 – Greece: Since Vodafone Greece announced a public offer for all remaining shares not held by the Group on 1 December 2003, the Group increased its effective interest in Vodafone Greece to 99.8% at 31 March 2006. Between 1 and 29 June 2006, the Group acquired a further 0.1% interest in Vodafone Greece through private transactions at a price equal to the price paid in the public offer, leading to an interest of 99.9%. |
| • | 3 November 2006 – Belgium: Disposed of 25% interest in Belgacom Mobile SA for €2.0 billion (£1.3 billion). |
| • | 25 November 2006 – Netherlands: Group’s shareholdings increased to 100.0% following a compulsory acquisition of outstanding shares. |
| • | 3 December 2006 – Egypt: Acquired an additional 4.8% stake in Vodafone Egypt bringing the Group’s interest to 54.9%. |
| • | 20 December 2006 – Switzerland: Disposed of 25% interest in Swisscom Mobile AG for CHF4.25 billion (£1.8 billion). |
| • | 8 May 2007 – India: Acquired companies with interests in Hutchison Essar for $10.9 billion (£5.5 billion), following which the Group controls Hutchison Essar (see note 35 to the Consolidated Financial Statements). |
| • | 9 May 2007 – India: A Bharti group company irrevocably agreed to purchase the Group’s 5.60% direct shareholding in Bharti Airtel (see note 35 to the Consolidated Financial Statements). |
| Vodafone Group Plc Annual Report 2007 | 23 |
Regulation
The Group’s operating companies are generally subject to regulation governing the operation of their business activities. Such regulation typically takes the form of industry-specific law and regulation covering telecommunications services and general competition (anti-trust) law applicable to all activities. Some regulation implements commitments made by Governments under the Basic Telecommunications Accord of the World Trade Organisation to facilitate market entry and establish regulatory frameworks.
The following section describes the regulatory framework and the key regulatory developments in the EU and selected countries in which the Group has significant interests. Many of the regulatory developments reported in the following section involve ongoing proceedings or consideration of potential proceedings that have not reached a conclusion. Accordingly, the Group is unable to attach a specific level of financial risk to the Group’s performance from such matters.
European Union
Although
all Member States of the EU (“Member States”) have now implemented the EU Regulatory Framework for the communications sector (“the EU Framework”),
which was adopted in 2002, there remain both ongoing and new infringement proceedings
against a number of Member States for late or inadequate implementation.
The EU Framework consists of four principal Directives outlining matters such as the objectives to be pursued by national regulatory authorities (“NRAs”), the way in which telecommunications operators are to be licensed, measures to be taken to protect consumers and ensure universal provision of certain telecommunications services and the terms and basis upon which operators interconnect and provide access to each other.
The EU Framework seeks to align the techniques for defining where sector specific regulation may be applied, and the threshold for when such regulation can be applied, with those already employed in EU competition law. It is also intended to ensure consistency of approach amongst NRAs within the Member States. All NRAs are required to take utmost account of a list of markets which are specified by the European Commission (the “Commission”) in a Recommendation when deciding which markets to investigate. The first such Recommendation was published by the Commission in February 2003 and includes markets at a wholesale level for ‘voice call termination on individual mobile networks’ (the “call termination market”), the ‘wholesale national market for international roaming’ (the “roaming market”) and the wholesale market for ‘access and call origination’ (the “access market”) on public mobile networks (together the “relevant markets”). NRAs may, with the Commission’s consent, also propose markets not included in the Recommendation.
The Commission is currently reviewing the Framework and the Recommendation (“the review”) and a revised list of markets is expected to come into force during 2007. This review may lead to an increase or a decrease in the number and scope of markets subject to sector specific regulation. Changes to the Recommendation are expected to become effective in late 2007 or early 2008, while any changes to the EU Framework would become effective following their transposition into national law from around 2010 onwards. The Commission currently proposes changes to the way spectrum is managed in Europe to increase flexibility, a change to the institutional framework aimed at greater consistency and harmonisation
and the inclusion of functional separation as a possible regulatory remedy. The impact of the review will depend on the changes actually adopted by the EU, the manner in which revised directives are subsequently implemented in Member States and how the revised regulatory framework will be applied by the respective NRAs.
Under the EU Framework, regulation can only be applied to undertakings with significant market power (“SMP”), either individually or collectively, in the relevant markets, subject to the Commission’s consent. SMP under the EU Framework accords with the concept of “dominance” under existing EU competition law. For individual dominance, this generally implies a market share of at least 40%, although other factors may also be taken into consideration. The Commission published SMP Guidelines in July 2002, which set out principles for use by NRAs in the analysis of markets to determine if undertakings have SMP under the EU Framework.
Spectrum
In February 2007, the Commission published a Communication on its plans to introduce greater flexibility in the use of spectrum in selected bands, including 2G and 3G bands, through the use of Decisions agreed with the
Radio Spectrum Committee (an EU level committee comprising the Commission and Member States). These reforms are expected to take place in advance of the review, which is proposing full service and technology neutrality as the general principle in
spectrum management, spectrum trading and greater coordination among Member States. The first proposed measure is a replacement of the GSM Directive by a decision to allow the deployment of UMTS services using 900 MHz and 1800 MHz
spectrum.
The Commission and the RSPG (“Radio Spectrum Policy Group”) are analysing the various options for the use of the spectrum that will be released after the analogue broadcasting switch-off, the so called “digital dividend”. The Commission has sent a mandate to the European Conference of Postal and Telecommunications Administrations (“CEPT”) to verify the technical feasibility of using part of the digital dividend for mobile services.
International Roaming
In February 2006, the Commission proposed
new legislation by way of a regulation (the “roaming regulation”)
under Article 95 of the EU Treaty (which would have immediate effect) to reduce
what it considers to be excessive prices charged by mobile network operators
for international roaming services. These proposals have been amended and
adopted by the European Parliament and by the European Council on 7 June 2007
and will come into force on 30 June 2007. The regulation
requires mobile operators to offer, within 1 month of the regulation coming
into force, a ‘Euro-tariff’ under which the cost of making calls
within the EU is capped at 49 eurocents per minute and the cost of receiving
calls within the EU is capped at 24 eurocents per minute. Customers who have
not otherwise already opted for another roaming tariff (such as Vodafone Passport)
must be automatically opted onto the Euro-tariff within three months of the
regulation coming into force. The regulation also requires that wholesale
roaming charges within the EU are capped at an average rate of 30 eurocents
per minute within 2 months of the regulation coming into force and that operators
provide certain tariff transparency services to customers when they roam.
The level of the retail and wholesale caps will fall further 12 and 24 months
following the application of the regulation. The roaming regulation will terminate
after 3 years.
Anti-trust proceedings in relation to international roaming continue. In July 2004, the Commission issued a statement of objections, a document detailing its proposed findings following its investigation into the UK market for wholesale international roaming and, in January 2005, the Commission issued a statement of objections following its investigation of the German market. In both cases the statement of objections was addressed to both the national mobile operating subsidiaries and to the Company and, in both
| 24 | Vodafone Group Plc Annual Report 2007 |
| Business | |
cases, Vodafone has responded in writing and in oral proceedings to both statements of objections, as subsequently amended.
The Commission’s proposed findings are that Vodafone has monopoly power over its wholesale customers in both the UK and Germany. Vodafone UK and Vodafone Germany are alleged to have engaged in excessive or unfair pricing. The Commission alleges that the abuse occurred from 1997 to at least September 2003 in the UK and from 2000 to December 2003 in Germany. In the event the Commission finds that there has been a breach of competition law, it may impose a fine on any addressee who had committed the breach.
Separately, the roaming market is one of the relevant markets in the Recommendation. In view of the proposed roaming regulation the Commission has proposed that this market be removed from the list during the review.
Regulation in Vodafone’s Markets
Europe
Germany
Vodafone Germany has been found to
have SMP in the call termination market and the NRA
has set Vodafone’s termination rate at 8.79 eurocents per minute. In April
2007, an administrative court ruled that the NRA decision is invalid insofar
as it provides for ex ante regulation as a consequence of the SMP decision. This
decision is under appeal.
The NRA has recently notified to the European Commission its findings that no operator had SMP in the access market.
The NRA has concluded that it will harmonise the expiry of all 2G licences in 2016 and on 15 May 2007 extended Vodafone’s licence accordingly. The NRA is also consulting on proposals to licence spectrum at 2.6 GHz (“the 3G extension band”) and unused spectrum at 1.8 GHz and 2 GHz (“core 3G band”) during 2008.
In May 2007, the Commission issued a reasoned opinion, which was the second stage of infringement proceedings against Germany. This opinion alleged that new provisions in German law could grant Deutsche Telekom an exemption from regulation, in spite of a finding that it had a dominant position in the fixed broadband market.
Italy
The NRA has concluded that all mobile network operators have SMP in the call termination market and has imposed obligations on Vodafone Italy, including price controls, and the NRA foresees further reductions on
both 1 July 2007 and 1 July 2008 of 13% below the retail price index from the rate of 11.20 eurocents currently charged. The NRA has also decided to impose a cost orientation obligation to a competitor, Hutchison Italy, but
is still considering at what level and over what time period.
The NRA concluded its review of the access market in February 2006 and found that no operator had SMP but has said it will keep the market under review and has indicated that it will commence a further market review. In addition, the NRA sought to find SMP in the market for wholesale access to premium rate and non-geographic services but subsequently withdrew this proposal. In March 2005, the National Competition Authority (“NCA”) in Italy conducted unannounced inspections of the offices of mobile network operators in Italy, including Vodafone Italy, seeking evidence of collusion following complaints by resellers and potential MVNOs about alleged anticompetitive conduct. Vodafone Italy submitted undertakings to the NCA in 2007 which have been accepted by the NCA, resolving the issues for Vodafone without further action. The proceeding is still continuing against TIM and Wind and a final decision is expected before August 2007.
A new law announced in January 2007 has prohibited the application of fees or other charges in addition to airtime for prepaid services and has also introduced transparency measures to enable consumers to terminate subscription contracts without penalties.
Spain
In 2006, the Spanish NRA found
all mobile network operators to have SMP in the call termination market and imposed
obligations including non discrimination, cost orientation and accounting separation
on Vodafone Spain. Vodafone Spain expects to reduce rates from 10.48 eurocents
to 7 eurocents in six monthly reductions up to April 2009.
In February 2006, the NRA found that all three mobile network operators held a position of joint SMP in the access markets. This decision was reviewed by the European Commission and the NRA was allowed to proceed. The NRA has the power to impose wholesale network access terms facilitating the entry of firms including MVNOs, although it has not done so to date. Vodafone has appealed against the decision of the NRA to find Vodafone as holding SMP in the Spanish courts and has appealed the decision of the European Commission to allow the NRA to proceed to the Court of First Instance at Luxembourg.
United Kingdom
The NRA found that all mobile
network operators have SMP in the call termination market in respect of calls
conveyed over both 2G
and 3G networks. Vodafone’s average termination rate is set at 5.7p per
minute for the financial year ending 31 March 2008. Rates then decline by 3.2%
below the retail price index in the 2009 financial year and 2.5% below the retail
price index in the 2010 and 2011 financial years. The NRA is considering a modification
to the charge controls on mobile termination rates to remove the effect of number
portability
on effective termination rates.
The NRA is currently investigating a complaint from BT plc about the level of Vodafone’s termination rates from September 2004.
The NRA is assessing whether to liberalise the use of 2G spectrum. The NRA is proposing to auction the so called 3G extension bands during 2008 and to auction the spectrum released by digital switchover in the second half of 2008.
Albania
In March 2006, the NRA issued
for consultation to the operators its analysis of the mobile market in Albania,
where the NRA proposed to designate the mobile network operators, including Vodafone
Albania, as having
SMP
in two markets: the call termination market and “the market of mobile services
to end users”. As a result, the NRA proposes obligations of transparency,
non-discrimination and access obligations. The NRA may also impose retail price
controls.
Vodafone Albania has submitted its comments and objections on the NRA’s market analysis. In April 2007, the NRA decided to extend Vodafone Albania’s SMP status to October 2007. Vodafone Albania is evaluating the decision. In addition, the Competition Authority commenced an investigation and has reached the preliminary conclusion that during the period from 2000 to 2005 Vodafone Albania was dominant in the mobile market and abused the dominant position by charging unfair and/or excessive prices. Vodafone Albania will respond in a hearing set for June 2007. In the event the decision is confirmed, Vodafone Albania faces the risk of a fine.
Greece
The NRA has found all firms
to have SMP in the call termination market. Vodafone Greece will reduce its rate
from 11.74 eurocents to 10.71 eurocents in June 2007.
In March 2006, the three largest mobile network operators were found by the NRA to have colluded in the setting of retail SMS prices and were fined
| Vodafone Group Plc Annual Report 2007 | 25 |
Regulation
continued
€1 million each. Vodafone Greece has filed an administrative appeal and a hearing has been held.
In January 2007, Vodafone Greece was fined €76 million by the Administrative Authority for Secrecy of Communications (“ADAE”) having been made aware of a security issue in its network. Software foreign to the network and capable of intercepting calls had been installed without Vodafone’s knowledge in the network software created, supported and maintained by an external supplier. The foreign software was removed without delay and the Greek authorities were promptly informed. Vodafone Greece has paid the fine but is appealing against the decision. Due to the interception incident, the NRA has required Vodafone Greece to give its views on any breach of the Greek electronic communications legislation, including breach of privacy and secrecy of communication.
Ireland
In its review of the call termination market,
the NRA has found that all mobile network operators have SMP. The NRA has
imposed obligations of cost orientation and non-discrimination on all operators
and obligations of accounting separation
and transparency on Vodafone and O2. Vodafone Ireland
has agreed to reduce its rates by 11% below the retail price index per annum
for the 24 months commencing January 2006.
The NRA is conducting a second review of the access market. The previous joint SMP designation of Vodafone and O2 was annulled on appeal.
The fixed incumbent, eircom, which also owns Meteor, Ireland’s third largest mobile operator, was awarded the fourth 3G licence in March 2007.
Malta
In the call termination market, the NRA has
found both mobile network operators as having SMP and has imposed obligations
on Vodafone Malta of cost orientation, non-discrimination, accounting separation
and transparency. Vodafone Malta reduced its mobile termination rates from
4.65 Maltese cents per minute in January 2006 to 4.39 Maltese cents and will
further reduce the rates to 4.13 Maltese cents in January 2008. The NRA has
found Vodafone and Go Mobile, the two Maltese mobile network operators, as
having joint SMP in the access market and proposes to impose an obligation
to offer cost based access to MVNOs.
The Netherlands
The NRA had proposed that all operators have
SMP and proposed remedies of cost orientation, non-discrimination and transparency.
The NRA’s proposal was appealed and its proposal was rejected by the
court. The NRA is currently rerunning its review of the call termination market
and proposes that Vodafone Netherlands reduce its rates to €0.07
by 1 July 2009 from €0.11
currently with the cuts phased over two years from 1 July 2007.
In March 2007, the Government decided to extend the 2G 900 MHz licences which expire in 2010. The Vodafone Netherlands licence will be extended for three years at a total price of €36.5 million, to be paid in yearly instalments from March 2010.
The deadline to comply with 3G licence coverage obligations has been postponed from January 2007 to September 2007. A consultation is expected before then on the interpretation of the roll-out obligations.
The Ministry is consulting on proposals to licence 3G extension band spectrum at 2.6 GHz.
Portugal
Following its review of the call termination
market, the NRA found all three mobile network operators as having SMP and
has imposed obligations on Vodafone Portugal including cost orientation, non-discrimination,
accounting separation and transparency. In October 2006, Vodafone Portugal
reduced its mobile termination rates in the final step of the regulated glidepath
to 11 eurocents.
The NRA’s analysis of the access market is expected to take place in 2007.
Vodafone Portugal has had its 2G licence renewed for a period of 15 years from October 2006 with terms which remain essentially unchanged from those which previously applied.
In October 2006, the NRA approved a change to the terms of Vodafone Portugal’s licence to allow the provision of the Vodafone Casa service.
EMAPA
Australia
Vodafone Australia’s appeal of the NCA’s
decision requiring Vodafone Australia’s mobile termination rates to fall
from 21 Australian cents per minute to 12 Australian cents per minute for
the period 2005 to 2007 was rejected by the Australian Competition Tribunal.
The NRA is now in the process of setting rates for the period July 2007 to
June 2009.
Czech Republic
In February 2005, Vodafone Czech Republic
was awarded a 3G licence. The EU investigated a complaint but concluded in
December 2006 that the award did not breach EU competition law.
In its review of the call termination market, the NRA has proposed that all mobile network operators have SMP and has imposed obligations of cost orientation, non-discrimination, accounting separation and transparency. Vodafone Czech Republic complied with a requirement to reduce its call termination rates from July 2006 by 4% from CZK 3.11 per minute to CZK 2.99 per minute. In its review of the access market, the NRA found that no mobile network operator had SMP.
Egypt
In July 2006, the Government awarded a third
mobile licence to Etisalat, which enables both 2G and 3G services, and awarded
a 3G mobile licence to Vodafone Egypt in January 2007. Mobile number portability
and national roaming are expected to be implemented in Egypt in 2007 and are
the subject of continuing discussions with the NRA.
Fiji
During 2006, the Fijian Government proceeded
with proposals to remove exclusive rights and began a process of consultation
with Vodafone Fiji regarding potential compensation for the loss of exclusivity.
In December 2006, the Government was removed and the interim Government is
considering how best to proceed with telecommunications reform.
Hungary
In its second review of the call termination
market, the NRA has proposed that all mobile network operators have SMP and
has imposed obligations of cost orientation, non-discrimination, accounting
separation and transparency. Vodafone Hungary had appealed similar findings
following the first review. In May 2005, Vodafone Hungary complied with a
requirement following the first review to reduce its call termination rates
by 16%. Subsequently the NRA has required Vodafone to reduce its rates in
a series of steps to 16.84 HUF by 1 January 2009. Vodafone Hungary has appealed
these decisions.
India
In April 2007, the Department of Telecommunications
(“DoT”) completed the tender process to issue subsidies from the
universal service fund for provision of infrastructure and mobile services
in specified rural and remote areas.
In April 2007, the NRA also submitted Recommendations on Infrastructure Sharing to the DoT, which recommended that licensees be permitted to commercially agree “active” infrastructure sharing arrangements. This would include Node Bs, Radio Access Networks, and backhaul between Base Transceiver Stations and the Base Station Controller, but not spectrum. The DoT is considering the NRA’s Recommendations.
| 26 | Vodafone Group Plc Annual Report 2007 |
| Business | |
From 1 April 2007, a new Access Deficit Charge (“ADC”) regime became effective, which will result in a 38% reduction of the total ADC paid by operators in the 2008 financial year. It is proposed that the ADC be removed by the 2009 financial year.
In February 2007, the NRA set price controls on national roaming retail tariffs, which will result in up to 56% reduction of tariffs. In December 2006, the DoT rejected the NRA’s recommendation that mobile number portability should be implemented.
The DoT is expected to announce its plans to allocate and license 3G and WiMAX spectrum in 2007.
Kenya
In May 2007, a Communications Amendment Bill
was submitted to Parliament which if passed would result in significant changes
to the regulatory environment.
In February 2007, the NRA reduced Safaricom’s and Celtel’s mobile call termination rates from Ksh 8.12 per minute to Ksh 6.28 per minute from 1 March 2007. This followed a previous reduction of Safaricom’s mobile call termination rate from Ksh 10 per minute in October 2006. The NRA undertook to carry out a review at the end of 2007 before introducing new interconnection rates for January 2008. The NRA also imposed a Ksh 30 per minute retail price cap that will be imposed on mobile off-net voice calls from 1 July 2007.
In September 2006, Safaricom obtained a one year 3G trial licence.
New Zealand
The NRA released a report proposing regulation
of mobile termination rates for fixed to mobile calls, including a rate reduction
of 44% from 27 New Zealand cents per minute to 15 New Zealand cents per minute
and reducing further to 12 New Zealand cents per minute by the 2011 financial
year. These proposals were submitted to the Minister for approval, who requested
the NRA to reconsider them. The NRA did so and published a further position
in which its key findings remain essentially unchanged. These were resubmitted
to the Minister for reconsideration in the context of new offers by the two
mobile operators to reduce mobile termination rates voluntarily and, where
relevant, to pass through savings from reduced rates to end users of fixed
to mobile calling. The Minister decided to reject the NRA decision in favour
of the industry solution. The NRA is also investigating regulation of national
roaming and co-location and Vodafone has tabled an undertaking for these services.
Following feedback from the NRA, Vodafone has tabled a revised undertaking
which will be taken into account by the NRA in producing its draft report.
During 2006, Vodafone New Zealand was successful in obtaining a determination from the NRA in support of local interconnection services with the fixed incumbent, Telecom New Zealand. Local and mobile number portability was introduced on 1 April 2007.
The Government has determined the process for the renewal of 900 MHz 2G licences which expire in the 2012 financial year, ensuring that a quarter of the spectrum passes into the hands of a new entrant. Although currently used for 2G services this spectrum may be used for the provision of UMTS services. The price to Vodafone for renewal of the remaining spectrum is yet to be determined.
During 2006, the Government intervened to regulate local loop unbundling and the operational separation of Telecom New Zealand.
Poland
The
NRA, in its review of the call termination market, has found that all mobile
network operators (including Vodafone’s joint venture, Polkomtel) have
SMP and it has imposed obligations of cost orientation, transparency and non-discrimination.
In April 2007, the NRA issued a decision in which it proposes to require Polkomtel
to reduce its termination rate to 0.40 PLN in
May 2007 and to further reduce it in three annual steps to 0.2162 PLN by May 2010.
Romania
The NRA in Romania is implementing market
reviews as required by the EU Framework following Romania’s entry to
the EU in January 2007.
In its review of the call termination market, the NRA has proposed that all mobile network operators have SMP and has imposed obligations of cost orientation, non-discrimination and accounting separation. In September 2006, the NRA reduced termination rates to 7.21 eurocents. In January 2008, rates are to reduce to 6.40 eurocents and in January 2009 to 5.03 eurocents. Vodafone Romania has appealed this decision.
Regulations mandating the introduction of number portability were adopted in March 2007.
The Romanian Competition Authority is investigating the termination rates charged by Vodafone Romania to international carriers. If Vodafone Romania is found to have infringed the competition law, it could be subject to a fine.
South Africa
The Electronic Communications Act became
effective in July 2006, replacing previous telecommunications and broadcasting
legislation. The Act introduces a new licence regime, which all existing licences
are required to be converted prior to July 2007 but, to date, the NRA has
not issued the process by which this would occur.
An Information Communication Technologies Black Economic Empowerment Sector Code (the “Sector Code”) is expected to be finalised in 2007. The Sector Code will set targets to evaluate a company’s contribution to Broad-Based Black Economic Empowerment, under which is the Government policy to increase economic empowerment of historically disadvantaged individuals in South Africa.
Separately, in January 2007, the NRA issued proposals to declare Vodacom, MTN and Cell C as having SMP in the wholesale mobile call termination market and the imposition of regulation, including LRIC-based (Long Run Average Incremental Cost) price controls, on Vodacom and MTN. A final decision is expected before the end of 2007.
In May 2006, the Government submitted the Regulation of Interception of Communications and Provision of Communication-related Information Amendment Bill (“Bill”) to Parliament. The Bill requires mobile operators to register all existing pre-pay subscribers within 12 months and that all subscribers not registered by this date must be disconnected. Vodacom and other mobile operators have been engaged with the Government, law enforcement agencies and Parliament to extend the registration period and agree the information to be registered. The Bill is expected to be finalised by July 2007.
Mobile number portability was implemented in November 2006.
Turkey
The Turkish Government is considering enacting
a new Communications Law as part of a broader harmonisation of domestic law
and regulation with the EU Framework.
The NRA determined as of January 2006 that all three operators were dominant in relation to mobile termination on their own networks. In June and July 2006, the NRA determined historic interconnection disputes between Telsim and Turk Telecom and Telsim and Avea. The NRA also announced on 2 June 2006 forward-looking interconnection “reference rates”, which it proposes as a reference point for resolving any further interconnection disputes between operators. These rates were YTL 0.152 for Vodafone Turkey, YTL 0.14 for Turkcell and YTL 0.175 for Avea. Vodafone Turkey has appealed these decisions and has agreed rates with Turkcell for
| Vodafone Group Plc Annual Report 2007 | 27 |
Regulation
continued
three years which are significantly higher than the NRA’s proposals. For Vodafone Turkey, rates of YTL 0.1737 for the 2007 financial year, YTL 0.165 for the 2008 financial year and YTL 0.16 for the 2009 financial year were agreed and, for Turkcell, a rate of YTL 0.16 until the 2009 financial year was agreed. The NRA announced further rates which it intends to apply from 1 March 2007, being YTL 0.145 for Vodafone Turkey, YTL 0.136 for Turkcell and YTL 0.167 for Avea.
The Turkish Government has stopped the conduct of an auction of 3G mobile licences, originally intended for 25 May 2007.
US
The Federal Communications Commission (“FCC”),
the United States’ NRA, commenced a Notice of Inquiry in 2004 into the
level of termination rates charged by foreign mobile network operators to
US international operators. The FCC sought inputs on the status of foreign
mobile termination rates, including actions taken to date by foreign regulators
to address the issue. This proceeding remains pending.
China
The timing and terms of 3G licence awards,
and related changes to the telecommunications regulatory framework, are currently
under review by the Chinese Government.
France
In its review of the call termination market,
the NRA concluded that all mobile network operators have SMP and imposed obligations
of cost orientation, non-discrimination, accounting separation and transparency.
It has set a price cap for Vodafone’s associated undertaking, SFR, of
7.5 eurocents per minute from 1 January 2007.
The NRA has found all mobile network operators to have SMP in a new market, the market for wholesale SMS termination, and has imposed a price cap for wholesale termination of no greater than 3 eurocents per minute for SFR and Orange and 3.5 eurocents for Bouygues.
In March 2007, the Minister responsible for electronic communications launched a call for tenders for a fourth 3G licence. The deadline for applications is 31 July 2007. The fourth licence will contain a right for the licensee to request some 2G spectrum. This could have an impact on the timing of refarming as current 2G spectrum assignments may need to be revised.
| 28 | Vodafone Group Plc Annual Report 2007 |
| Performance | |
Performance Introduction
The following discussion is based on the Consolidated Financial Statements included elsewhere in this Annual Report.
The Consolidated Financial Statements are prepared in accordance with IFRS as issued by the IASB and as adopted for use in the EU. IFRS as issued by the IASB and IFRS as adopted for use in the EU differ in certain significant respects from US GAAP. Reconciliations of the material differences in the IFRS Consolidated Financial Statements to US GAAP are disclosed in note 38 to the Consolidated Financial Statements.
The Group faces a number of significant risks that may impact on its future performance and activities. Please see “Performance – Risk Factors, Seasonality and Outlook”.
Foreign Currency Translation
The Company publishes its Consolidated Financial
Statements in pounds sterling. However, the majority of the Company’s
subsidiaries, joint ventures and associated undertakings report their revenue,
costs, assets and liabilities in currencies other than pounds sterling and
the Company translates the revenue, costs, assets and liabilities of those
subsidiaries, joint ventures and associated undertakings into pounds sterling
when preparing its Consolidated Financial Statements. Consequently, fluctuations
in the value of pounds sterling versus other currencies could materially affect
the amount of these items in the Consolidated Financial Statements, even if
their value has not changed in their original currency.
The following table sets out the pounds sterling exchange rates of the other principal currencies of the Group, being: “euros”, “€” or “eurocents”, the currency of the EU Member States which have adopted the euro as their currency, and “US dollars”, “$”, “cents” or “¢”, the currency of the United States.
| At / year ended 31 March | Change | |||||
| Currency (=£1) | 2007 | 2006 | % | |||
| Average: | ||||||
| Euro | 1.48 | 1.47 | 0.7 | |||
| US dollar | 1.89 | 1.79 | 5.6 | |||
| At 31 March: | ||||||
| Euro | 1.47 | 1.43 | 2.8 | |||
| US dollar | 1.97 | 1.74 | 13.2 | |||
Merely for convenience, this Annual Report contains translations of certain pounds sterling amounts into US dollars at specified rates. These translations should not be construed as representations that the pounds sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated or at any other rate. Unless otherwise indicated, the translations of pounds sterling into US dollars have been made at $1.9685 per £1.00, the Noon Buying Rate in the City of New York for cable transfers in sterling amounts as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on 30 March 2007. The Noon Buying Rate on 25 May 2007 was $1.9845 per £1.00.
The following table sets out, for the periods and dates indicated, the period end, average, high and low Noon Buying Rates for pounds sterling expressed in US dollars per £1.00, to two decimal places.
| Years ended 31 March | Period end | Average | High | Low | |
| 2002 | 1.42 | 1.43 | 1.48 | 1.37 | |
| 2003 | 1.58 | 1.54 | 1.65 | 1.43 | |
| 2004 | 1.84 | 1.69 | 1.90 | 1.55 | |
| 2005 | 1.89 | 1.85 | 1.96 | 1.75 | |
| 2006 | 1.74 | 1.79 | 1.92 | 1.71 | |
| 2007 | 1.97 | 1.89 | 1.98 | 1.74 | |
| Month | High | Low | ||
| November 2006 | 1.9693 | 1.8883 | ||
| December 2006 | 1.9794 | 1.9458 | ||
| January 2007 | 1.9847 | 1.9305 | ||
| February 2007 | 1.9699 | 1.9443 | ||
| March 2007 | 1.9694 | 1.9235 | ||
| April 2007 | 2.0061 | 1.9608 | ||
| May 2007(1) | 1.9993 | 1.9695 | ||
| Note: | |
| (1) | In respect of May 2007, for the period from 1 May to 25 May 2007, inclusive. |
Inflation
Inflation has not had a significant effect
on the Group’s results of operations and financial condition during the
three years ended 31 March 2007.
Presentation of Information
In the discussion of the Group’s reported
financial position and results, information in addition to that contained
within the Consolidated Financial Statements is presented. Refer to page 159
for definition of terms.
| Vodafone Group Plc Annual Report 2007 | 29 |
Critical Accounting Estimates
The Group prepares its Consolidated Financial Statements in accordance with IFRS, the application of which often requires judgements to be made by management when formulating the Group’s financial position and results. Under IFRS, the directors are required to adopt those accounting policies most appropriate to the Group’s circumstances for the purpose of presenting fairly the Group’s financial position, financial performance and cash flows. The Group also prepares a reconciliation of the Group’s revenue, net profit or loss and shareholders’ equity between IFRS and US GAAP.
In determining and applying accounting policies, judgement is often required in respect of items where the choice of specific policy, accounting estimate or assumption to be followed could materially affect the reported results or net asset position of the Group should it later be determined that a different choice would be more appropriate.
Management considers the accounting estimates and assumptions discussed below to be its critical accounting estimates and, accordingly, provides an explanation of each below. Where it is considered that the Group’s US GAAP accounting policies differ materially from the IFRS accounting policy, a separate explanation is provided.
The discussion below should also be read in conjunction with the Group’s disclosure of significant IFRS accounting policies, which is provided in note 2 to the Consolidated Financial Statements, “Significant accounting policies” and with the “US GAAP information” provided in note 38 to the Consolidated Financial Statements.
Management has discussed its critical accounting estimates and associated disclosures with the Company’s Audit Committee.
Impairment Reviews
Asset recoverability is an area involving
management judgement, requiring assessment as to whether the carrying value
of assets can be supported by the net present value of future cash flows derived
from such assets using cash flow projections which have been discounted at
an appropriate rate. In calculating the net present value of the future cash
flows, certain assumptions are required to be made in respect of highly uncertain
matters, as noted below.
IFRS requires management to undertake an annual test for impairment of indefinite lived assets and, for finite lived assets, to test for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Group management currently undertakes an annual impairment test covering goodwill and other indefinite lived assets and also reviews finite lived assets and investments in associated undertakings at least annually to consider whether a full impairment review is required. In the year to 31 March 2007, the Group has recognised impairment losses amounting to £11,600 million relating to the Group’s operations in Germany and Italy.
US GAAP
Under US GAAP, the requirements for testing
the recoverability of intangible assets and property, plant and equipment
differ from IFRS. US GAAP requires the carrying value of such assets with
finite lives to be compared to undiscounted future cash flows over the remaining
useful life of the primary asset of the asset group being tested for impairment,
to determine if the asset or asset group is recoverable. If the carrying value
exceeds the undiscounted cash flows, the carrying value is not recoverable
and the asset or asset group is written down to the net present value of future
cash flows derived in a manner similar to IFRS.
For purposes of goodwill impairment testing under US GAAP, the fair value of a reporting unit including goodwill is compared to its carrying value. If the fair value of a reporting unit is lower than its carrying value, the fair value of the goodwill within that reporting unit is compared with its respective carrying value, with any excess carrying value written off as an impairment. The fair value of the goodwill is the difference between the fair
value of the reporting unit and the fair value of the net assets of the reporting unit.
The carrying value of the Group’s mobile operations in Germany at 31 January 2007, the date of the Group’s annual impairment test, was more than £25 billion, significantly in excess of its fair value, estimated using discounted cash flows. However, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, no impairment has been recognised as the estimated undiscounted cash flows are in excess of the carrying value. At 31 January 2007, a 16.0% reduction in the undiscounted cash flows would eliminate this excess and result in a material impairment loss under US GAAP. Any impairment loss would be measured by comparing the carrying value of the Group’s mobile operations in Germany with its respective fair value, estimated using discounted cash flows.
Assumptions
There are a number of assumptions and estimates
involved in calculating the net present value of future cash flows from the
Group’s businesses, including management’s expectations of:
| • | growth in EBITDA, calculated as adjusted operating profit before depreciation and amortisation; |
| • | timing and quantum of future capital expenditure; |
| • | uncertainty of future technological developments; |
| • | long term growth rates; and |
| • | the selection of discount rates to reflect the risks involved. |
| The Group prepares and internally approves formal ten-year plans for its businesses and uses these as the basis for its impairment reviews. Management uses the initial five years of the plans, except in markets which are forecast to grow ahead of the long term growth rate for the market. In such cases, further years will be used until the forecast growth rate trends towards the long term growth rate, up to a maximum of ten years. | |
| For mobile businesses where the first five years of the ten year management plan are used for the Group’s value in use calculations, a long term growth rate into perpetuity has been determined as the lower of: | |
| • | the nominal GDP rates for the country of operation; and |
| • | the long term compound annual growth rate in EBITDA in years six to ten of the management plan. |
| For mobile businesses where the full ten year management plans are used for the Group’s value in use calculations, a long term growth rate into perpetuity has been determined as the lower of: | |
| • | the nominal GDP rates for the country of operation; and |
| • | the compound annual growth rate in EBITDA in years nine to ten of the management plan. |
| For non-mobile businesses, no growth is expected beyond management’s plans for the initial five year period. | |
| Changing the assumptions selected by management, in particular the discount rate and growth rate assumptions used in the cash flow projections, could significantly affect the Group’s impairment evaluation and, hence, results. | |
| The Group’s review includes the key assumptions related to sensitivity in the cash flow projections. | |
| 30 | Vodafone Group Plc Annual Report 2007 |
| Performance | |
The following changes to the assumptions used in the impairment review would have (increased)/decreased the combined impairment loss recognised in the year ended 31 March 2007 in respect of the Group’s mobile operations in Germany and Italy:
| Increase by 1/2% | Decrease by 1/2% | |||
| £bn | £bn | |||
| Discount rate | (1.4 | ) | 1.5 | |
| Budgeted EBITDA(1) | 0.8 | (0.8 | ) | |
| Capital expenditure(2) | (0.1 | ) | 0.1 | |
| Long term growth rate | 1.7 | (1.5 | ) | |
| Notes: | |
| (1) | Represents the compound annual growth rate for the initial five years of the Group’s approved financial plans. |
| (2) | Represents capital expenditure as a percentage of revenue in the initial five years of the Group’s approved plans. |
These assumption changes in isolation would not have resulted in an impairment loss in any other of the Group’s continuing operations.
US GAAP
Under US GAAP, the assumptions and
estimates involved in reviewing for impairment are similar to IFRS, with the
exception of the requirement to determine the primary asset of an asset group.
For asset groups
represented by the Group’s operating companies, the primary asset is determined
as the 3G licence, except for operating companies where no 3G licence has been
acquired, in which case the 2G licence is the primary asset. If the primary asset
of
the Group’s mobile operations in Germany were the 2G rather than the 3G
licence, the carrying value would exceed the undiscounted cash flows and result
in a significant impairment loss.
Business Combinations
Goodwill
only arises in business combinations. The amount of goodwill initially recognised
is dependent on the allocation of the purchase price to the fair value of the
identifiable assets acquired and the liabilities assumed. The determination of
the fair value of the assets and liabilities is based, to a considerable extent,
on management’s judgement.
Allocation of the purchase price affects the results of the Group as finite lived intangible assets are amortised, whereas indefinite lived intangible assets, including goodwill, are not amortised and could result in differing amortisation charges based on the allocation to indefinite lived and finite lived intangible assets.
On the acquisition of mobile network operators, the identifiable intangible assets may include licences, customer bases and brands. The fair value of these assets is determined by discounting estimated future net cash flows generated by the asset, assuming no active market for the assets exist. The use of different assumptions for the expectations of future cash flows and the discount rate would change the valuation of the intangible assets.
IFRS
On
transition to IFRS, the Group elected not to apply IFRS 3, “Business Combinations”, retrospectively as the difficulty in applying these requirements to the large number of business combinations completed
by the Group from incorporation through to 1 April 2004 exceeded any potential benefits. Goodwill arising before the date of transition to IFRS, after adjusting for items including the impact of proportionate consolidation of joint ventures,
amounted to £78,753 million.
If the Group had elected to apply the accounting for business combinations retrospectively, it may have led to an increase or decrease in goodwill and increase in licences, customer bases, brands and related deferred tax liabilities recognised on acquisition.
US GAAP
For acquisitions prior to 29 September 2004, the key difference from IFRS was that for the acquisition of mobile network businesses, the excess of purchase price over the fair value of the identifiable assets and
liabilities
acquired other than licences (“the residual”) was allocated to licences, as opposed to goodwill. However, subsequent to this date and due to the prohibition of this method of accounting following the issuance of EITF Topic D-108, licences are valued using a direct valuation approach, with the residual being allocated to goodwill. For acquisitions preceding this date, the residual has been and will continue to be allocated to goodwill.
Intangible Assets, Excluding Goodwill
Other
intangible assets include the Group’s aggregate amounts spent on the acquisition
of 2G and 3G licences, customer bases, brands, computer software and development
costs. These assets arise from both separate purchases and from acquisition as
part of business combinations.
The relative size of the Group’s intangible assets, excluding goodwill, makes the judgements surrounding the estimated useful lives and basis of amortisation critical to the Group’s financial position and performance.
At 31 March 2007, intangible assets, excluding goodwill, amounted to £15,705 million (2006: £16,512 million) and represented 14.3% (2006: 13.0%) of the Group’s total assets.
Estimation of useful life
The
useful life used to amortise intangible assets relates to the future performance
of the assets acquired and management’s judgement of the period over which
economic benefit will be derived from the asset. The basis for determining the
useful life for the most significant categories of intangible assets is as follows:
Licences and spectrum fees
The estimated useful life is, generally,
the term of the licence, unless there is a presumption of renewal at negligible
cost. Using the licence term reflects the period over which the Group will receive
economic benefit. For technology specific licences with a presumption of renewal
at negligible cost, the estimated
useful economic life reflects the Group’s expectation of the period over
which the Group will continue to receive economic benefit from the licence. The
economic lives are periodically reviewed, taking into consideration such factors
as changes in technology. Historically, any changes to economic lives have not
been material following these reviews.
Customer bases
The estimated useful life principally
reflects management’s view of the average economic life of the customer
base and is assessed by reference to customer churn rates. An increase in
churn rates may lead to a reduction in the estimated useful life and an increase
in the amortisation charge. Historically, changes to the estimated useful
lives have not had a significant impact on the Group’s results and financial
position.
Capitalised software
The useful life is determined
by management at the time the software is acquired and brought into use and
is regularly reviewed for appropriateness. For computer software licences,
the useful life represents management’s view of expected benefits over
which the Group will receive benefits from the software, but not exceeding
the licence term. For unique software products controlled by the Group, the
life is based on historical experience with similar products as well as anticipation
of future events, which may impact their life, such as changes in technology.
Historically, changes in useful lives have not resulted in material changes to the Group’s amortisation charge.
Property, Plant and Equipment
Property,
plant and equipment also represent a significant proportion of the asset base
of the Group, being 12.3% (2006: 10.8%) of the Group’s total assets. Therefore, the estimates and assumptions made to
determine their carrying value and related depreciation are critical to the Group’s
financial position and performance.
| Vodafone Group Plc Annual Report 2007 | 31 |
Critical Accounting Estimates
continued
Estimation of useful life
The
charge in respect of periodic depreciation is derived after determining an estimate
of an asset’s expected useful life and the expected residual value at the end of its life. Increasing an asset’s
expected life or its residual value would result in a reduced depreciation charge in the Group’s
income statement.
The useful lives of Group assets are determined by management at the time the asset is acquired and reviewed annually for appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their life, such as changes in technology. Furthermore, network infrastructure is only depreciated over a period that extends beyond the expiry of the associated licence under which the operator provides telecommunications services, if there is a reasonable expectation of renewal or an alternative future use for the asset.
Historically, changes in useful lives have not resulted in material changes to the Group’s depreciation charge.
Cost capitalisation
Cost
includes the total purchase price and labour costs associated with the Group’s
own employees to the extent that they are directly attributable to construction
costs, or where they comprise a proportion of a department directly engaged in
the purchase or installation of a fixed asset. Management judgement is involved in determining the appropriate internal costs
to capitalise and the amounts involved. For the year ended 31 March 2007, internal
costs capitalised represented approximately 6% (2006: 7%) of expenditure on property,
plant and equipment and computer software and approximately 1% (2006: 1%) of
total operating expenses.
Taxation
The
Group’s tax charge on ordinary activities is the sum of the total current and deferred tax charges. The calculation of the Group’s total tax charge necessarily involves a degree of estimation and
judgement in respect of certain items whose tax treatment cannot be finally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a formal legal process. The final resolution of some of these items
may give rise to material profit and loss and/or cash flow variances. See “Performance – Financial Position and Resources”.
The growth in complexity of the Group’s structure following its rapid expansion geographically has made the degree of estimation and judgement more challenging. The resolution of issues is not always within the control of the Group and it is often dependent on the efficiency of the legal processes in the relevant taxing jurisdictions in which the Group operates. Issues can, and often do, take many years to resolve. Payments in respect of tax liabilities for an accounting period result from payments on account and on the final resolution of open items. As a result, there can be substantial differences between the tax charge in the income statement and tax payments.
Significant items on which the Group has exercised accounting judgement include a provision in respect of an enquiry from UK HM Revenue and Customs with regard to the Controlled Foreign Companies tax legislation (see note 6 to the Consolidated Financial Statements), legal proceedings to recover VAT in relation to 3G licence fees (see page 53) and potential tax losses in respect of a write down in the value of investments in Germany (see note 6 to the Consolidated Financial Statements). The amounts recognised in the Consolidated Financial Statements in respect of each matter are derived from the Group’s best estimation and judgement, as described above. However, the inherent uncertainty regarding the outcome of these items means eventual resolution could differ from the accounting estimates and therefore impact the Group’s results and cash flows.
Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future, against which the reversal of temporary differences
can be deducted. Recognition, therefore, involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised.
Historical differences between forecast and actual taxable profits have not resulted in material adjustments to the recognition of deferred tax assets.
Revenue Recognition and Presentation
Revenue
from mobile telecommunications comprises amounts charged to customers in respect
of monthly access charges, airtime charges, messaging, the provision of other
mobile telecommunications services, including data services and information provision,
fees for connecting users of other fixed line and mobile networks to the Group’s network, revenue from the sale of equipment, including handsets, and revenue arising from the Group’s
Partner Network
agreements.
Arrangements with multiple deliverables
In revenue arrangements including more than one deliverable, the arrangement consideration is allocated to each deliverable based on the fair value of the individual element. The Group generally determines the fair
value of individual elements based on prices at which the deliverable is regularly sold on a standalone basis.
Deferral period
Customer
connection fees, when combined with related equipment revenue, in excess of the
fair value of the equipment are deferred and recognised over the expected life
of the customer relationship. The life is determined by reference to historical
customer churn rates. An increase in churn rates would reduce the expected customer
relationship life and accelerate revenue recognition. Historically, changes to
the expected customer relationship lives have
not had a significant impact on the Group’s results and financial position.
Any excess upgrade or tariff migration fees over the fair value of equipment provided are deferred over the average upgrade or tariff migration period as appropriate. This time period is calculated based on historical activity of customers who upgrade or change tariffs. An increase in the time period would extend the period over which revenue is recognised.
Presentation
When
deciding the most appropriate basis for presenting revenue or costs of revenue,
both the legal form and substance of the agreement between the Group and its
business partners are reviewed to determine each
party’s respective role in the transaction.
Where the Group’s role in a transaction is that of principal, revenue is recognised on a gross basis. This requires revenue to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as an operating cost.
Where the Group’s role in a transaction is that of an agent, revenue is recognised on a net basis, with revenue representing the margin earned.
| 32 | Vodafone Group Plc Annual Report 2007 |
| Performance | |
Key Performance Indicators
The Board and the Executive Committee monitor the Group’s progress against its strategic objectives and the financial performance of the Group’s operations on a regular basis. Performance is assessed against the strategy, budgets and forecasts using financial and non-financial measures.
The following section details the most significant Key Performance Indicators (“KPIs”) used by the Group, describing their purpose, the basis of calculation and the source of the underlying data. Definitions of the key terms are provided on page 159.
FinancialThe Group uses the following primary measures to assess the performance of the Group and its individual businesses. A number of these measures at a Group level are presented on an organic basis, which provides an assessment of underlying growth excluding the effect of business acquisitions and disposals and changes in exchange rates. Financial measures presented on an organic basis are non-GAAP financial measures. For more information on these measures and the basis of calculation of organic growth see “Performance – Non-GAAP Information” on page 62.
Revenue
Revenue
and its growth for the Group, and its regions, covering the 2007, 2006 and 2005
financial years, is reviewed in “Performance – Operating Results” on
pages 34 to 51.
Revenue and revenue growth are used for internal performance analysis and by investors to assess progress against outlook statements provided externally by the Group.
Adjusted operating profit
Adjusted
operating profit is used by the Group for internal performance analysis as it
represents the underlying operating profitability of the Group’s businesses. The measure is presented both for the Group and
its regions, covering the 2007, 2006 and 2005 financial years, in “Performance –Operating Results” on pages 34 to 51. The basis of calculation, along with an analysis of why the Group believes it is a useful measure, is provided in
the section titled “Performance – Non-GAAP Information” on page
62.
Free cash flow
Free cash flow provides an evaluation
of the Group’s liquidity and the cash generated by the Group’s operations.
The calculation of free cash flow, along with an analysis of why the Group
believes it is a useful measure, is provided in the section titled “Performance
– Non-GAAP Information” on page 62. The Group has provided an outlook
for free cash flow in the 2008 financial year on page 60.
Operational
Certain
operational measures relating to customers and revenue for the Group and its
regions, covering the 2007, 2006 and 2005 financial years, are provided in “Performance – Operating Results” on
pages 34 to 51, with the exception of customer delight. These measures are commonly
used in the mobile communications industry.
Customers
The
Group highly values its customers and strives to delight them. As a result, customer
based KPIs are important measures for internal performance analysis. Management
also believes that some of these measures provide useful information for investors
regarding the success of the Group’s customer acquisition and retention activities. For customer numbers and churn, the data used to calculate the KPIs is derived from the customer relationship management
systems of each of the Group’s operations.
Customer numbers
The Group prepares customer numbers
on a venture, proportionate and controlled or jointly controlled basis for its
mobile operations. A summary of the customer numbers on all bases is presented
in “Business
Overview –
Where We Operate” on page 13.
Churn
Churn represents the disconnection
rate of customers in each of the Group’s mobile operations. It is calculated
as the total gross customer disconnections in the period divided by the average
total customers in the period. Churn rates stated in this Annual Report are calculated
for the entire financial year.
Customer delight
The
Group uses a proprietary ‘customer delight’ system to track customer
satisfaction across its controlled markets and jointly controlled market in Italy.
More information on the benefits of the system are
provided in “Business Overview – How We Deliver Our Services” on
page 17.
Customer delight is measured by an index based on the results of surveys performed by an external research company which cover all aspects of service provided by Vodafone and incorporates the results of the relative satisfaction of the competitors’ customers. An overall index for the Group is calculated by weighting the results for each of the Group’s operations based on service revenue.
Increased customer expectations are putting a downward pressure on customer satisfaction for the Group and many of its competitors. Despite this trend, the Group outperformed its target for customer delight in the 2007 financial year and the index was broadly stable compared to the previous financial year.
Revenue based measures
Management believes that revenue based measures provide useful information for investors regarding trends in customer revenue derived from mobile communications services and the extent to which customers use mobile
services.
The data used to calculate these KPIs is derived from a number of sources. Financial information, such as service revenue, is extracted from the Group’s financial systems, whilst operational information, including customer and usage metrics, is derived from the customer relationship management and billing systems of each of the Group’s operations.
Average revenue per user (“ARPU”)
ARPU represents the average revenue
by customers over a period and is calculated as service revenue, being total
revenue excluding equipment revenue and connection fees, divided by the weighted
average number of customers during the period. ARPU disclosed in this Annual
Report is presented on a monthly basis and represents the total ARPU for the
financial year divided by twelve.
Voice usage
Voice usage is the total number of
minutes of voice use on the Group’s mobile networks, including calls made
by the Group’s customers, often referred to as outgoing usage, and calls
received by the
Group’s customers, often referred to as incoming usage.
Messaging and data revenue
Messaging and data revenue represent
the non-voice element of service revenue. In recent years, these revenues have
grown at a faster rate than voice revenue as customers increasingly use these
services and new products and services have been launched. As competition has
intensified in many of the markets in which the Group operates and penetration
rates have increased, the ability of the Group to grow messaging and data revenue
has become an increasingly
important factor, internally and for investors.
Costs
Europe targets
The Group has set targets in respect
of revenue market share, operating expenses and capitalised fixed asset additions.
Progress against the revenue market share target is measured by tracking performance
in Germany, Italy, Spain and the UK against their principal competitors. The
operating expense and capitalised fixed asset additions targets relate to the
Europe region and common functions in aggregate. These targets are discussed
in more detail on pages 38 to
39.
| Vodafone Group Plc Annual Report 2007 | 33 |
This section presents detail of the Group’s operating performance for the 2007 financial year versus the 2006 financial year and for the 2006 financial year versus the 2005 financial year, providing understanding of how the revenue and the adjusted operating profit performance of the Group and its operating segments within the Europe and EMAPA regions have developed in the last three years.
During the year ended 31 March 2007, the Group changed the organisational structure of its operations. The following results are presented for continuing operations in accordance with the new organisational structure. Europe includes the results of the Group’s mobile operations in Western Europe and its fixed line business in Germany, while EMAPA includes the Group’s operations in Eastern Europe, the Middle East, Africa and Asia and the Pacific area and the Group’s associates and investments.
2007 Financial Year Compared to the 2006 Financial Year
| Group | ||||||||||||||||||
| Common | Group | Group | % change | |||||||||||||||
| Europe(1) | EMAPA | Functions | Eliminations | 2007 | 2006 | |||||||||||||
| £m | £m | £m | £m | £m | £m | £ | Organic | |||||||||||
| Voice revenue | 17,357 | 5,089 | – | (70 | ) | 22,376 | 21,405 | |||||||||||
| Messaging revenue(2) | 2,925 | 667 | – | (5 | ) | 3,587 | 3,289 | |||||||||||
| Data revenue(2) | 1,300 | 138 | – | (10 | ) | 1,428 | 1,098 | |||||||||||
| Fixed line operators and DSL revenue | 1,397 | 75 | – | – | 1,472 | 1,290 | ||||||||||||
| Other service revenue | 8 | – | – | – | 8 | – | ||||||||||||
| Total service revenue | 22,987 | 5,969 | – | (85 | ) | 28,871 | 27,082 | 6.6 | 4.7 | |||||||||
| Acquisition revenue | 1,004 | 381 | – | – | 1,385 | 1,295 | ||||||||||||
| Retention revenue | 354 | 21 | – | – | 375 | 448 | ||||||||||||
| Other revenue | 247 | 70 | 168 | (12 | ) | 473 | 525 | |||||||||||
| Total revenue | 24,592 | 6,441 | 168 | (97 | ) | 31,104 | 29,350 | 6.0 | 4.3 | |||||||||
| Interconnect costs | (3,668 | ) | (1,045 | ) | – | 85 | (4,628 | ) | (4,463 | ) | ||||||||
| Other direct costs | (1,914 | ) | (784 | ) | (66 | ) | 3 | (2,761 | ) | (2,096 | ) | |||||||
| Acquisition costs | (2,604 | ) | (677 | ) | – | – | (3,281 | ) | (2,968 | ) | ||||||||
| Retention costs | (1,543 | ) | (212 | ) | – | – | (1,755 | ) | (1,891 | ) | ||||||||
| Operating expenses | (5,462 | ) | (1,472 | ) | 206 | 9 | (6,719 | ) | (6,166 | ) | ||||||||
| Acquired intangibles amortisation | (22 | ) | (392 | ) | – | – | (414 | ) | (157 | ) | ||||||||
| Purchased licence amortisation | (849 | ) | (43 | ) | – | – | (892 | ) | (947 | ) | ||||||||
| Depreciation and other amortisation | (2,888 | ) | (779 | ) | (181 | ) | – | (3,848 | ) | (3,674 | ) | |||||||
| Share of result in associates | 5 | 2,719 | 1 | – | 2,725 | 2,411 | ||||||||||||
| Adjusted operating profit | 5,647 | 3,756 | 128 | – | 9,531 | 9,399 | 1.4 | 4.2 | ||||||||||
| Adjustments for: | ||||||||||||||||||
| – Non-operating income of associates | – | 3 | – | – | 3 | 17 | ||||||||||||
| – Impairment losses | (11,600 | ) | – | – | – | (11,600 | ) | (23,515 | ) | |||||||||
| – Other income and expense | 1 | 508 | (7 | ) | – | 502 | 15 | |||||||||||
| Operating loss | (5,952 | ) | 4,267 | 121 | – | (1,564 | ) | (14,084 | ) | |||||||||
| Non-operating income and expense | 4 | (2 | ) | |||||||||||||||
| Investment income | 756 | 353 | ||||||||||||||||
| Financing costs | (1,579 | ) | (1,120 | ) | ||||||||||||||
| Loss before taxation | (2,383 | ) | (14,853 | ) | ||||||||||||||
| Income tax expense | (2,423 | ) | (2,380 | ) | ||||||||||||||
| Loss for the financial year from continuing operations | (4,806 | ) | (17,233 | ) | ||||||||||||||
| Loss for the financial year from discontinued operations | (491 | ) | (4,588 | ) | ||||||||||||||
| Loss for the financial year | (5,297 | ) | (21,821 | ) | ||||||||||||||
| Notes: | |
| (1) | Within the Europe region, certain revenue and costs relating to Arcor have been reclassified. All prior periods have been adjusted accordingly. The reclassification had no effect on total revenue, EBITDA or adjusted operating profit. |
| (2) | Certain revenue relating to content delivered by SMS and MMS has been reclassified from messaging revenue to data revenue to provide a fairer presentation of messaging and data revenue. |
Revenue
Revenue increased by 6.0% to £31,104
million in the year to 31 March 2007, with organic growth of 4.3%. The net
impact of acquisitions and disposals contributed 3.3 percentage points to
revenue growth, offset by unfavourable movements in exchange rates of 1.6
percentage points, with both effects arising principally in the EMAPA region.
The Europe region recorded organic revenue growth of 1.4%, whilst the EMAPA region delivered organic revenue growth of 21.1%. As a result, the EMAPA region accounted for more than 70% of the organic growth in Group revenue. Strong performances were recorded in Spain and a number of the Group’s emerging markets.
An increase in the average mobile customer base and usage stimulation initiatives resulted in organic revenue growth of 2.5% and 7.0% in voice and messaging revenue, respectively. Data revenue is an increasingly important component of Group revenue, with organic growth of 30.7%, driven by increasing penetration from 3G devices and growth in revenue from business services.
The Europe region and common functions contributed 79% of Group revenue, of which approximately 63% was euro denominated, with the remaining 16% being denominated in sterling. The remaining 21% was generated in the EMAPA region where no single currency was individually significant.
| 34 | Vodafone Group Plc Annual Report 2007 |
| Performance | |
Operating result
Adjusted operating profit increased
by 1.4% to £9,531 million, with organic growth of 4.2%. The net impact
of acquisitions and disposals and unfavourable exchange rate movements reduced
reported growth by 0.3 percentage points and 2.5 percentage points, respectively,
with both effects arising principally in the EMAPA region. The Europe region
declined 4.7% on an organic basis, whilst the EMAPA region recorded organic
growth of 24.3%. Strong performances were delivered in Spain, the US and a
number of emerging markets.
Adjusted operating profit is stated after charges in relation to regulatory fines in Greece of £53 million and restructuring costs within common functions, Vodafone Germany, Vodafone UK and Other Europe of £79 million. The EMAPA region accounted for all of the Group’s reported and organic growth in adjusted operating profit.
Adjusted operating profit for the 2007 financial year was principally denominated in euro (55%), US dollar (22%) and sterling (5%), with the remaining 18% being denominated in other currencies.
The acquisitions and stake increases led to the rise in acquired intangible asset amortisation, and these acquisitions, combined with the continued expansion of network infrastructure in the region, resulted in higher depreciation charges.
The Group’s share of results from associates increased by 13.0%, mainly due to Verizon Wireless which reported record growth in net additions and increased ARPU. The growth in Verizon Wireless was offset by a reduction in the Group’s share of results from its other associated undertakings, which fell due to the disposals of Belgacom Mobile S.A. and Swisscom Mobile A.G. as well as the impact of reductions in termination rates and intense competition experienced by SFR in France.
Statutory operating loss was £1,564 million compared with a loss of £14,084 million in the previous financial year following lower impairment charges. In the year ended 31 March 2007, the Group recorded an impairment charge of £11,600 million (2006: £23,515 million) in relation to the carrying value of goodwill in the Group’s operations in Germany (£6,700 million) and Italy (£4,900 million). The impairment in Germany resulted from an increase in long term interest rates, which led to higher discount rates, along with increased price competition and continued regulatory pressures in the German market. The impairment in Italy resulted from an increase in long term interest rates and the estimated impact of legislation cancelling the fixed fees for the top up of prepaid cards and the related competitive response in the Italian market. The increase in interest rates accounted for £3,700 million of the reduction in value during the year.
Certain of the Group’s cost reduction and revenue stimulation initiatives are managed centrally within common functions. Consequently, operating and capital expenses are incurred centrally and recharged to the relevant countries, primarily in Europe. This typically results in higher operating expenses with a corresponding reduction in depreciation for the countries concerned.
Other income and expense for the year ended 31 March 2007 included the gains on disposal of Belgacom Mobile S.A. and Swisscom Mobile A.G., amounting to £441 million and £68 million, respectively.
| Investment income and financing costs | |||||||
| 2007 | 2006 | Change | |||||
| £m | £m | % | |||||
| Net financing costs before dividends | |||||||
| from investments(1) | (435 | ) | (318 | ) | 36.8 | ||
| Potential interest charges arising on | |||||||
| settlement of outstanding tax issues | (406 | ) | (329 | ) | 23.4 | ||
| Changes in the fair value of equity put | |||||||
| rights and similar arrangements | 2 | (161 | ) | 101.2 | |||
| Dividends from investments | 57 | 41 | 39.0 | ||||
| Foreign exchange(2) | (41 | ) | – | – | |||
| Net financing costs | (823 | ) | (767 | ) | 7.3 | ||
| Notes: | |
| (1) | Includes a one off gain of £86 million related to the Group renegotiating its investments in SoftBank |
| (2) | 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 |
Net financing costs before dividends from investments increased by 36.8% to £435 million as increased financing costs, reflecting higher average debt and interest rates, and losses on mark to market adjustments on financial instruments more than offset higher investment income resulting from new investments in SoftBank, which arose on the sale of Vodafone Japan during the year, including an £86 million gain related to the renegotiation of these investments. At 31 March 2007, the provision for potential interest charges arising on settlement of outstanding tax issues was £1,213 million.
Taxation
The effective tax rate, exclusive of impairment
losses, is 26.3% (2006: 27.5%), which
is lower than the Group’s weighted
average tax rate due to the resolution
of a number of historic tax issues
with tax authorities and additional tax
deductions in Italy. The prior year benefited
from the tax treatment of a share repurchase
in Vodafone Italy and favourable
tax settlements.
A significant event in the year was a European Court decision in respect of the UK Controlled Foreign Company (“CFC”) legislation, following which Vodafone has not accrued any additional provision in respect of the application of UK CFC legislation to the Group.
The effective tax rate including impairment losses is (101.7)% compared to (16.0)% for the prior year. The negative tax rates arise from no tax benefit being recorded for the impairment losses of £11,600m (2006: £23,515m).
Basic loss per share
Basic loss per share from continuing
operations decreased from 27.66 pence to a loss per share of 8.94 pence for the
current year. The basic loss per share is after a charge of 21.04 pence per share
(2006: 37.56 pence per share) in relation to an impairment of the carrying value
of goodwill.
| Vodafone Group Plc Annual Report 2007 | 35 |
Operating Results
continued
Europe
| % change | ||||||||||||||||||||
| Germany | Italy | Spain | UK | Arcor | Other | Eliminations | Europe | |||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £ | Organic | |||||||||||
| Year ended 31 March 2007 | ||||||||||||||||||||
| Voice revenue | 3,995 | 3,329 | 3,435 | 3,621 | – | 3,320 | (343 | ) | 17,357 | (2.6 | ) | |||||||||
| Messaging revenue | 746 | 563 | 380 | 760 | – | 501 | (25 | ) | 2,925 | 3.1 | ||||||||||
| Data revenue | 413 | 189 | 247 | 295 | – | 194 | (38 | ) | 1,300 | 27.1 | ||||||||||
| Fixed line operator and DSL revenue | 1 | – | – | – | 1,419 | 3 | (26 | ) | 1,397 | 9.9 | ||||||||||
| Other service revenue | 1 | 2 | – | 5 | – | – | – | 8 | ||||||||||||
| Total service revenue | 5,156 | 4,083 | 4,062 | 4,681 | 1,419 | 4,018 | (432 | ) | 22,987 | 0.1 | 2.0 | |||||||||
| Acquisition revenue | 172 | 124 | 307 | 274 | 22 | 108 | (3 | ) | 1,004 | (1.4 | ) | |||||||||
| Retention revenue | 40 | 36 | 124 | 52 | – | 102 | – | 354 | (18.4 | ) | ||||||||||
| Other revenue | 75 | 2 | 7 | 117 | – | 47 | (1 | ) | 247 | (23.8 | ) | |||||||||
| Total revenue | 5,443 | 4,245 | 4,500 | 5,124 | 1,441 | 4,275 | (436 | ) | 24,592 | (0.6 | ) | 1.4 | ||||||||
| Interconnect costs | (645 | ) | (628 | ) | (675 | ) | (1,001 | ) | (338 | ) | (813 | ) | 432 | (3,668 | ) | (1.9 | ) | |||
| Other direct costs | (332 | ) | (242 | ) | (352 | ) | (452 | ) | (262 | ) | (275 | ) | 1 | (1,914 | ) | 14.9 | ||||
| Acquisition costs | (560 | ) | (249 | ) | (642 | ) | (677 | ) | (178 | ) | (301 | ) | 3 | (2,604 | ) | 4.1 | ||||
| Retention costs | (351 | ) | (107 | ) | (398 | ) | (372 | ) | – | (315 | ) | – | (1,543 | ) | (11.9 | ) | ||||
| Operating expenses | (1,126 | ) | (870 | ) | (866 | ) | (1,163 | ) | (396 | ) | (1,041 | ) | – | (5,462 | ) | 4.2 | ||||
| Acquired intangibles amortisation | – | – | – | (11 | ) | – | (11 | ) | – | (22 | ) | |||||||||
| Purchased licence amortisation | (340 | ) | (75 | ) | (37 | ) | (333 | ) | – | (64 | ) | – | (849 | ) | ||||||
| Depreciation and other amortisation | (735 | ) | (499 | ) | (430 | ) | (604 | ) | (96 | ) | (524 | ) | – | (2,888 | ) | |||||
| Share of result in associates | – | – | – | – | – | 5 | – | 5 | ||||||||||||
| Adjusted operating profit | 1,354 | 1,575 | 1,100 | 511 | 171 | 936 | – | 5,647 | (5.1 | ) | (4.7 | ) | ||||||||
| Year ended 31 March 2006 | ||||||||||||||||||||
| Voice revenue | 4,304 | 3,472 | 3,093 | 3,642 | – | 3,672 | (356 | ) | 17,827 | |||||||||||
| Messaging revenue | 815 | 526 | 328 | 674 | – | 507 | (14 | ) | 2,836 | |||||||||||
| Data revenue | 275 | 172 | 194 | 252 | – | 170 | (40 | ) | 1,023 | |||||||||||
| Fixed line operator and DSL revenue | – | – | – | – | 1,305 | – | (34 | ) | 1,271 | |||||||||||
| Total service revenue | 5,394 | 4,170 | 3,615 | 4,568 | 1,305 | 4,349 | (444 | ) | 22,957 | |||||||||||
| Acquisition revenue | 185 | 94 | 269 | 285 | 15 | 170 | – | 1,018 | ||||||||||||
| Retention revenue | 61 | 84 | 105 | 60 | – | 124 | – | 434 | ||||||||||||
| Other revenue | 114 | 15 | 6 | 135 | – | 54 | – | 324 | ||||||||||||
| Total revenue | 5,754 | 4,363 | 3,995 | 5,048 | 1,320 | 4,697 | (444 | ) | 24,733 | |||||||||||
| Interconnect costs | (732 | ) | (681 | ) | (634 | ) | (862 | ) | (368 | ) | (906 | ) | 444 | (3,739 | ) | |||||
| Other direct costs | (281 | ) | (241 | ) | (329 | ) | (355 | ) | (187 | ) | (273 | ) | – | (1,666 | ) | |||||
| Acquisition costs | (551 | ) | (172 | ) | (543 | ) | (665 | ) | (147 | ) | (423 | ) | – | (2,501 | ) | |||||
| Retention costs | (410 | ) | (177 | ) | (354 | ) | (455 | ) | – | (356 | ) | – | (1,752 | ) | ||||||
| Operating expenses | (1,077 | ) | (822 | ) | (762 | ) | (1,088 | ) | (390 | ) | (1,104 | ) | – | (5,243 | ) | |||||
| Acquired intangibles amortisation | – | – | – | – | – | (2 | ) | – | (2 | ) | ||||||||||
| Purchased licence amortisation | (342 | ) | (74 | ) | (69 | ) | (333 | ) | – | (66 | ) | – | (884 | ) | ||||||
| Depreciation and other amortisation | (865 | ) | (524 | ) | (336 | ) | (592 | ) | (89 | ) | (594 | ) | – | (3,000 | ) | |||||
| Share of result in associates | – | – | – | – | – | 5 | – | 5 | ||||||||||||
| Adjusted operating profit | 1,496 | 1,672 | 968 | 698 | 139 | 978 | – | 5,951 | ||||||||||||
| Change at constant exchange rates | % | % | % | % | % | % | ||||||||||||||
| Voice revenue | (6.7 | ) | (3.6 | ) | 11.8 | (0.6 | ) | – | (9.2 | ) | ||||||||||
| Messaging revenue | (7.8 | ) | 7.6 | 16.8 | 12.8 | – | (0.6 | ) | ||||||||||||
| Data revenue | 51.2 | 10.8 | 27.5 | 17.1 | – | 15.1 | ||||||||||||||
| Fixed line operator and DSL revenue | – | – | – | – | 9.5 | – | ||||||||||||||
| Total service revenue | (3.9 | ) | (1.5 | ) | 13.1 | 2.5 | 9.5 | (7.2 | ) | |||||||||||
| Acquisition revenue | (6.4 | ) | 33.1 | 14.5 | (3.9 | ) | 45.7 | (35.7 | ) | |||||||||||
| Retention revenue | (34.1 | ) | (57.2 | ) | 18.8 | (13.3 | ) | – | (17.2 | ) | ||||||||||
| Other revenue | (33.5 | ) | (89.8 | ) | 22.5 | (13.3 | ) | – | (15.7 | ) | ||||||||||
| Total revenue | (4.8 | ) | (2.2 | ) | 13.3 | 1.5 | 9.8 | (8.6 | ) | |||||||||||
| Interconnect costs | (11.4 | ) | (7.2 | ) | 7.0 | 16.1 | (7.6 | ) | (9.7 | ) | ||||||||||
| Other direct costs | 18.9 | 0.8 | 7.6 | 27.3 | 41.6 | 1.0 | ||||||||||||||
| Acquisition costs | 2.2 | 46.1 | 18.8 | 1.8 | 21.3 | (28.6 | ) | |||||||||||||
| Retention costs | (13.8 | ) | (39.3 | ) | 13.1 | (18.2 | ) | – | (11.2 | ) | ||||||||||
| Operating expenses | 5.1 | 6.6 | 14.2 | 6.9 | 2.3 | (5.5 | ) | |||||||||||||
| Acquired intangibles amortisation | – | – | – | – | – | 423.8 | ||||||||||||||
| Purchased licence amortisation | – | 1.5 | (45.4 | ) | – | – | (3.5 | ) | ||||||||||||
| Depreciation and other amortisation | (14.4 | ) | (4.5 | ) | 28.9 | 2.0 | 6.8 | (11.2 | ) | |||||||||||
| Share of result in associates | – | – | – | – | – | – | ||||||||||||||
| Adjusted operating profit | (9.0 | ) | (5.3 | ) | 14.4 | (26.8 | ) | 24.0 | (3.7 | ) | ||||||||||
| 36 | Vodafone Group Plc Annual Report 2007 |
| Performance | |
| Mobile telecommunications KPIs | Germany | Italy | Spain | UK | Other | Europe | ||||||||
| Closing customers (‘000) | 2007 | 30,818 | 21,034 | 14,893 | 17,411 | 17,007 | 101,163 | |||||||
| 2006 | 29,191 | 18,490 | 13,521 | 16,304 | 15,692 | 93,198 | ||||||||
| Average monthly ARPU | 2007 | €21.2 | €25.9 | €35.2 | £23.6 | £20.1 | ||||||||
| 2006 | €23.3 | €28.5 | €35.6 | £24.0 | £22.0 | |||||||||
| Annualised blended churn (%) | 2007 | 21.8% | 20.6% | 26.4% | 33.8% | 26.6% | ||||||||
| 2006 | 20.2% | 18.7% | 20.9% | 32.1% | 24.2% | |||||||||
| Closing 3G devices (‘000) | 2007 | 3,720 | 3,762 | 2,890 | 1,938 | 2,353 | 14,663 | |||||||
| 2006 | 2,025 | 2,250 | 902 | 1,033 | 1,230 | 7,440 | ||||||||
| Voice usage (millions of minutes) | 2007 | 33,473 | 32,432 | 30,414 | 31,736 | 28,491 | 156,546 | |||||||
| 2006 | 26,787 | 29,604 | 23,835 | 28,059 | 27,648 | 135,933 | ||||||||
| See page 159 for definition of terms |
The Europe region, where market penetration exceeds 100%, continues to experience intense competition from established mobile operators and new market entrants as well as ongoing regulator imposed rate reductions on incoming calls. As part of the implementation of the Group’s strategy, the current year’s performance saw a strong focus on stimulating additional usage in a way that enhances value to the customer and revenue, including significant tariff repositioning to maintain competitiveness in the UK and Germany. On the cost side, the centralisation of global service platform operations was completed in the year, with good progress made in the consolidation and harmonisation of the data centres, and a number of new initiatives to reduce the cost structure were implemented.
Revenue
Total revenue decreased slightly
by 0.6% for the year ended 31 March 2007, consisting of a 1.4% organic increase
in revenue, offset by a 0.5 percentage point adverse impact from exchange
rate movements and a 1.5 percentage point decrease resulting from the disposal
of the Group’s operations in Sweden in January 2006. The organic revenue
growth was mainly due to the increase in organic service revenue.
Service revenue growth was 0.1% for the Europe region. Organic growth of 2.0% was driven by a 7.7% increase in the average mobile customer base in the year, together with a 17.0% increase in total voice usage and 27.1% reported growth in data revenue, driven by innovative products and services, successful promotions and competitive tariffs in the marketplace, although in turn organic growth was largely offset by the downward pressure on voice pricing and termination rate cuts in certain markets. The estimated impact of termination rate cuts and other adjustments on the growth in service revenue and total revenue in the year is shown below.
| Estimated | ||||||||||||
| impact of | ||||||||||||
| termination | ||||||||||||
| rate cuts | ||||||||||||
| Impact of | and other | |||||||||||
| exchange | Impact of | adjustments | (1) | Growth | ||||||||
| Reported | rates | disposal | Organic | on revenue | excluding | |||||||
| growth | Percentage | Percentage | growth | growth | these items | |||||||
| % | points | points | % | % | % | |||||||
| Service revenue | ||||||||||||
| Germany | (4.4 | ) | 0.5 | – | (3.9 | ) | 3.4 | (0.5 | ) | |||
| Italy | (2.1 | ) | 0.6 | – | (1.5 | ) | 5.1 | 3.6 | ||||
| Spain | 12.4 | 0.7 | – | 13.1 | 5.2 | 18.3 | ||||||
| UK | 2.5 | – | – | 2.5 | 0.5 | 3.0 | ||||||
| Arcor | 8.7 | 0.8 | – | 9.5 | – | 9.5 | ||||||
| Other Europe | (7.6 | ) | 0.4 | 7.3 | 0.1 | 4.7 | 4.8 | |||||
| Europe | 0.1 | 0.5 | 1.4 | 2.0 | 3.5 | 5.5 | ||||||
| Total revenue | ||||||||||||
| Europe | (0.6 | ) | 0.5 | 1.5 | 1.4 | 3.2 | 4.6 |
| Note: | |
| (1) | Revenue for certain arrangements is now presented net of associated direct costs |
Customer growth in the region was strong in most markets, including 21.7% and 16.9% growth in the closing contract customer base in Spain and Italy, respectively. The UK reported a 7.7% growth in the closing contract base following a much improved performance in the second half of the year.
Contract churn across the region was stable or falling in most markets due to the continued focus on retention and longer contract terms being offered, whilst prepaid churn rose due to intensified competition and customer self-upgrades. Prepaid markets remained vibrant, with prepaid net additions accounting for around 65% of the total net additions reported for the region.
Within the Europe region, Spain and Arcor contributed strong service revenue growth, partly offset by declines in Germany, Italy and Other Europe. In Spain, despite the increasing challenge in the marketplace from existing competitors, the launch of a fourth operator and branded resellers, local currency service revenue growth of 13.1% was achieved. This growth was mainly due to a 14.2% increase in the average mobile customer base in the period following successful promotions and competitive tariffs, particularly in relation to contract customers, which now account for 54.8% of the customer base, compared to 49.6% last year. Arcor also achieved strong growth in service revenue compared to the prior year, driven primarily by a 60.0% increase in DSL customers to 2,081,000 customers, with the launch of new competitive tariffs leading to particularly good growth since January 2007. Despite high competition and structural price declines, service revenue growth in the UK accelerated throughout the year, driven by a higher contract customer base and increased usage resulting from refreshed tariff offerings. In Other Europe, reported service revenue decreased by 7.6%, whilst underlying service revenue increased by 4.8% following an increase in the average mobile customer base, and particularly strong growth in messaging and data revenue in the Netherlands and Portugal where new tariffs and Vodafone Mobile Connect data card initiatives proved particularly successful.
Germany and Italy reported declines in local currency service revenue of 3.9% and 1.5% respectively, largely as a result of termination rate cuts. Underlying service revenue in Italy grew by 3.6%, with acceleration in the second half of the year due in particular to increasing messaging and voice volumes, achieved through new tariffs and offers targeted to specific segments, and despite the revenue loss incurred in March 2007 following the Italian Government’s decision to eliminate the top up fee on prepaid cards. In Germany, underlying service revenue declined slightly as a result of the intensely competitive market in Germany and the launch of new tariffs in October 2006.
Voice revenue
Voice revenue decreased by 2.6%,
or by 0.7% on an organic basis, with strong growth in voice usage offset by
pressures on pricing resulting from competition and from termination rate
cuts.
Across the Europe region, outgoing voice minutes increased by 20.7%, or by 22.3% on an organic basis, driven by the increased customer base and various usage stimulation initiatives and competitive tariff ranges. In Germany, outgoing voice usage increased by 35.7%, with continued success from the Vodafone Zuhause product, which promotes fixed to mobile substitution in the home and which achieved 2.4 million registered customers as at 31 March 2007. Additionally, new tariffs were launched in Germany in October 2006, which provided improved value bundles for customers allowing unlimited calls to other Vodafone customers and fixed line customers, all of which significantly contributed to increasing outgoing voice usage. In Italy, the increase in outgoing voice usage of 12.1% was mainly driven by demand stimulation initiatives such as fixed price per call
| Vodafone Group Plc Annual Report 2007 | 37 |
Operating Results
continued
offers and focus on high value customers and business customers. In Spain, the improved customer mix and success of both consumer and business offerings assisted in increasing outgoing voice usage by 34.2%. New and more competitive tariffs launched in the UK in July 2006 and September 2006 and various promotions specifically aimed at encouraging usage contributed to the 16.7% increase in Vodafone UK’s outgoing voice usage.
Offsetting the organic growth in outgoing voice usage was the impact of pricing pressures in all markets due to increased competition, which has led to outgoing voice revenue per minute decreasing by 16.8% in the year ended 31 March 2007.
Termination rate cuts were the main factor in the 7.4% decline in organic incoming voice revenue, with all markets except the UK experiencing termination rate cuts during the year. Announced termination rate cuts since 30 September 2006 include a cut of 7% to 11.35 eurocents per minute in Spain effective from October 2006 and a 20% cut to 8.8 eurocents per minute in Germany effective from November 2006. The impact of the termination rate cuts in the Europe region was to reduce the average effective incoming price per minute by around 13% to approximately 7 pence. Further termination rate cuts of 0.87 eurocents every six months will occur in Spain with effect from April 2007, reducing the rate to 7.0 eurocents by April 2009, whilst in Italy reductions in July 2007 and July 2008 of 13% below the retail price index have also been announced.
The success of Vodafone Passport, a competitively priced roaming proposition with over 11 million customers as at 31 March 2007, contributed to increasing the volume of organic roaming minutes by 15.8% . Around 50% of the Group’s roaming minutes within Europe are now on Vodafone Passport. Organic roaming revenue increased by 1.2% as the higher usage was largely offset by price reductions, due to increasing adoption of Vodafone Passport and also the Group’s commitment to reduce the average cost of roaming in the EU by 40% by April 2007 when compared to summer 2005.
On 23 May 2007, the European Parliament voted to introduce regulation on retail and wholesale roaming prices. We expect roaming revenues to be lower year on year in 2008 due to the combined effect of Vodafone’s own initiatives and this direct regulatory intervention.
Non-voice revenue
Messaging revenue increased by
3.1%, or by 4.6% on an organic basis, mainly due to growth in Italy, Other
Europe and particularly Spain and the UK, partly offset by declines in Germany.
In Spain, the increase was driven by the larger customer base, while in the
UK, SMS volumes increased by 25.0% following higher usage per customer. The
growth in Italy was driven by an increase in SMS usage of 9.5%, with sharp
acceleration in the second half of the year following successful demand stimulation
initiatives. In Germany, messaging volumes declined, resulting from the attraction
of bigger voice bundles and the fact that promotional activity that had occurred
relating to messaging in the previous financial year was not repeated in the
2007 financial year.
Data revenue grew by 27.1%, or by 29.5% on an organic basis, with the growth being stimulated by the 97.1% increase in registered 3G enabled devices on the Group’s networks as at 31 March 2007, encouraged by an expanded portfolio and competitively priced offerings. Strong growth was experienced in all Europe’s segments, though Germany demonstrated particularly strong growth of 50% as a result of attractive tariff offerings, including flat rate tariff options, and the benefit of improved coverage of the HSDPA technology enabled network, facilitating superior download speeds for data services. Growth in Italy, Spain and the UK has been assisted by the roll-out of HSDPA network coverage and increased penetration of Vodafone Mobile Connect data cards, of which 74%, 64% and 53% were sold during the year as HSDPA enabled devices in each of these markets respectively. The launch of a modem which provides wireless internet access for personal computers has also made a positive contribution to data revenue. In Other Europe, successful Vodafone Mobile Connect data cards initiatives in the Netherlands and Portugal were the primary cause of growth in data revenue.
Fixed line operator and DSL revenue increased by 9.9%, due to Arcor’s increased customer base.
Adjusted operating profit
Adjusted operating profit fell
by 5.1%, or by 4.7% on an organic basis, with the disposal of the Group’s
operations in Sweden being the main cause of the decline. The growth in operating
expenses and other direct costs, including the charge in relation to a regulatory
fine in Greece of £53 million also had an adverse effect on adjusted
operating profit.
Interconnect costs remained stable for the year, once the effect of the disposal of Sweden was excluded, with the increased outgoing call volumes to other networks offset by the cost benefit from the impact of the termination rate cuts.
Reported acquisition and retention costs for the region decreased by 2.5%, but remained stable on an organic basis, when compared to the prior year. In Spain, the main drivers of the increased costs were the higher volumes of gross additions and upgrades, especially with regard to the higher proportion of contract gross additions which are being achieved with higher costs per customer as competition has intensified. In Italy, costs have increased slightly due to an increased focus on acquiring high value contract customers and an increased volume of prepaid customers. In Germany, retention costs declined as the cost per upgrade was reduced and volumes slightly decreased. The UK saw a reduction in retention costs resulting from a change in the underlying commercial model with indirect distribution partners, where a portion of commissions are now recognised in other direct costs. Acquisition costs in Other Europe decreased, primarily as a result of lower gross contract additions in Greece and a reduction in cost per gross addition in the Netherlands.
Other direct costs increased by 14.9%, or by 16.7% on an organic basis, primarily caused by the regulatory fine in Greece and commissions in the UK discussed above. Arcor saw an increase in direct access charges primarily as a result of having a higher customer base.
Operating expenses increased by 4.2%, or by 7.4% on an organic basis, primarily caused by increased intercompany recharges, a result of the centralisation of data centre and service platform operations, which were offset by a corresponding reduction in depreciation expense, and a 14.2% increase in local currency in Spain’s operating expenses as a result of the growth in this operating company, but which only slightly increased as a percentage of service revenue. Increased publicity spend in the UK, Italy and Greece, and restructuring costs in Germany, the UK and Ireland, also adversely affected operating expenses during the year.
As many of the cost reduction initiatives are centralised in common functions, as described earlier, the Group’s target in respect of operating expenses for the total of the Europe region (excluding Arcor) includes common functions but excludes the developing and delivering of new services and business restructuring costs. On this basis, these costs grew by 3.5% in 2007 financial year for the reasons outlined in the preceding paragraph.
Cost reduction initiatives
The Group has set targets in respect
operating expenses and capitalised fixed asset additions. The operating expense
and capitalised fixed asset additions targets relate to the Europe region
(excluding Arcor) and common functions in aggregate. The targets are detailed
in “Performance – Risk Factors, Seasonality and Outlook” on
page 60. During 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 Group. The initiative is currently in the |
| 38 | Vodafone Group Plc Annual Report 2007 |
<<<<<
| Performance | |
| execution phase and is progressing ahead of plan, with a number of operating companies already having commenced service with their respective vendors. 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 Group currently expects to meet its savings target of 25-30% of IT application development and maintenance unit costs within two to four years. | |
| • | The supply chain management initiative focuses on centralising 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. The alignment of all objectives and targets across the entire supply chain management was completed during the year. The Group currently expects to meet its savings target of 8% of £3.3 billion external network spend this coming year, as planned. |
| • | The IT operations initiative has created a shared service organisation to support the business with innovative and customer focused IT services. This organisation will consolidate localised data centres into regionalised northern and southern European centres and consolidate hardware, software, maintenance and system integration suppliers to provide high quality IT infrastructure, services and solutions. Consolidation is progressing well, with the centre in Southern Europe complete and the centre in |
| Northern Europe expected to be complete by April 2008. The Group currently expects to meet its cost savings target of 25-30% of data centre spend within one to two years. | |
| • | The Group has commenced a three year business transformation programme to implement a single integrated operating model, supported by a single enterprise resource planning (“ERP”) system covering human resources, 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. |
| • | The network team continues to focus on network sharing deals in a number of operating companies, with the principal objectives of cost saving and faster network rollout. Implementation is under way in Spain with Orange, the UK has announced its intention to sign a deal with Orange and other deals are being explored and evaluated in a number of other European operating companies. |
| • | Many of the Group’s operating companies have participated in external cost benchmarking studies and are 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. |
| Vodafone Group Plc Annual Report 2007 | 39 |
Operating Results
continued
EMAPA
| Eastern | Middle East, | Associates | Associates | % change | |||||||||||
| Europe | Africa & Asia | Pacific | US | Other | EMAPA | ||||||||||
| £m | £m | £m | £m | £m | £m | £ | Organic | ||||||||
| Year ended 31 March 2007 | |||||||||||||||
| Voice revenue | 2,051 | 2,096 | 942 | 5,089 | 40.0 | ||||||||||
| Messaging revenue | 271 | 142 | 254 | 667 | 46.9 | ||||||||||
| Data revenue | 70 | 26 | 42 | 138 | 60.5 | ||||||||||
| Fixed line operator and DSL revenue | – | 68 | 7 | 75 | 294.7 | ||||||||||
| Total service revenue | 2,392 | 2,332 | 1,245 | 5,969 | 42.3 | 20.4 | |||||||||
| Acquisition revenue | 53 | 223 | 105 | 381 | 37.5 | ||||||||||
| Retention revenue | 19 | – | 2 | 21 | 50.0 | ||||||||||
| Other revenue | 13 | 10 | 47 | 70 | 2.9 | ||||||||||
| Total revenue | 2,477 | 2,565 | 1,399 | 6,441 | 41.4 | 21.1 | |||||||||
| Interconnect costs | (433 | ) | (364 | ) | (248 | ) | (1,045 | ) | 31.6 | ||||||
| Other direct costs | (314 | ) | (246 | ) | (224 | ) | (784 | ) | 77.4 | ||||||
| Acquisition costs | (219 | ) | (291 | ) | (167 | ) | (677 | ) | 45.0 | ||||||
| Retention costs | (78 | ) | (84 | ) | (50 | ) | (212 | ) | 52.5 | ||||||
| Operating expenses | (614 | ) | (509 | ) | (349 | ) | (1,472 | ) | 39.8 | ||||||
| Acquired intangibles amortisation | (285 | ) | (105 | ) | (2 | ) | (392 | ) | 152.9 | ||||||
| Purchased licence amortisation | (19 | ) | (17 | ) | (7 | ) | (43 | ) | (31.7 | ) | |||||
| Depreciation and other amortisation | (331 | ) | (255 | ) | (193 | ) | (779 | ) | 29.4 | ||||||
| Share of result in associates | – | – | – | 2,077 | 642 | 2,719 | 13.4 | ||||||||
| Adjusted operating profit | 184 | 694 | 159 | 2,077 | 642 | 3,756 | 16.0 | 24.3 | |||||||
| Year ended 31 March 2006 | |||||||||||||||
| Voice revenue | 1,176 | 1,503 | 957 | 3,636 | |||||||||||
| Messaging revenue | 146 | 91 | 217 | 454 | |||||||||||
| Data revenue | 36 | 12 | 38 | 86 | |||||||||||
| Fixed line operators and DSL revenue | – | 19 | – | 19 | |||||||||||
| Total service revenue | 1,358 | 1,625 | 1,212 | 4,195 | |||||||||||
| Acquisition revenue | 54 | 147 | 76 | 277 | |||||||||||
| Retention revenue | 13 | – | 1 | 14 | |||||||||||
| Other revenue | 10 | 12 | 46 | 68 | |||||||||||
| Total revenue | 1,435 | 1,784 | 1,335 | 4,554 | |||||||||||
| Interconnect costs | (296 | ) | (251 | ) | (247 | ) | (794 | ) | |||||||
| Other direct costs | (77 | ) | (159 | ) | (206 | ) | (442 | ) | |||||||
| Acquisition costs | (148 | ) | (198 | ) | (121 | ) | (467 | ) | |||||||
| Retention costs | (51 | ) | (48 | ) | (40 | ) | (139 | ) | |||||||
| Operating expenses | (335 | ) | (359 | ) | (359 | ) | (1,053 | ) | |||||||
| Acquired intangibles amortisation | (121 | ) | (33 | ) | (1 | ) | (155 | ) | |||||||
| Purchased licence amortisation | (13 | ) | (34 | ) | (16 | ) | (63 | ) | |||||||
| Depreciation and other amortisation | (218 | ) | (179 | ) | (205 | ) | (602 | ) | |||||||
| Share of result in associates | – | – | – | 1,732 | 666 | 2,398 | |||||||||
| Adjusted operating profit | 176 | 523 | 140 | 1,732 | 666 | 3,237 | |||||||||
| Change at constant exchange rates | % | % | % | % | % | ||||||||||
| Voice revenue | 80.3 | 56.7 | 5.3 | ||||||||||||
| Messaging revenue | 88.7 | 74.8 | 25.4 | ||||||||||||
| Data revenue | 100.1 | 142.6 | 17.2 | ||||||||||||
| Fixed line operators and DSL revenue | – | 294.3 | – | ||||||||||||
| Total service revenue | 81.7 | 61.2 | 10.0 | ||||||||||||
| Acquisition revenue | 1.4 | 78.0 | 43.0 | ||||||||||||
| Retention revenue | 50.0 | – | 217.5 | ||||||||||||
| Other revenue | 15.4 | (7.8 | ) | 12.8 | |||||||||||
| Total revenue | 78.0 | 62.1 | 12.1 | ||||||||||||
| Interconnect costs | 49.8 | 62.3 | 7.1 | ||||||||||||
| Other direct costs | 316.4 | 73.2 | 15.8 | ||||||||||||
| Acquisition costs | 53.9 | 70.8 | 45.0 | ||||||||||||
| Retention costs | 59.3 | 106.7 | 31.1 | ||||||||||||
| Operating expenses | 88.4 | 61.0 | 3.4 | ||||||||||||
| Acquired intangibles amortisation | 135.5 | 222.2 | 78.6 | ||||||||||||
| Purchased licence amortisation | 48.0 | (47.1 | ) | (49.8 | ) | ||||||||||
| Depreciation and other amortisation | 55.9 | 56.1 | 1.6 | ||||||||||||
| Share of result in associates | – | – | – | 27.6 | (2.3 | ) | |||||||||
| Adjusted operating profit | 12.1 | 49.8 | 25.4 | 27.6 | (2.3 | ) | |||||||||
| 40 | Vodafone Group Plc Annual Report 2007 |
| Performance | |
Mobile telecommunications KPIs
| 2007 | 2006 | |||||||||||||||||
| Eastern | Middle East, | Eastern | Middle East, | |||||||||||||||
| Europe | Africa & Asia | Pacific | EMAPA | Europe | Africa & Asia | Pacific | EMAPA | |||||||||||
| Closing customers (’000) | 28,975 | 27,160 | 5,750 | 61,885 | 12,579 | 21,884 | 5,346 | 39,809 | ||||||||||
| Average monthly ARPU | £8.1 | £7.3 | £18.8 | £10.8 | £9.0 | £19.7 | ||||||||||||
| Annualised blended churn (%) | 28.1% | 38.8% | 38.7% | 23.6% | 34.6% | 39.2% | ||||||||||||
| Closing 3G devices (’000) | 347 | 65 | 758 | 1,170 | 135 | – | 281 | 416 | ||||||||||
| Voice usage (millions of minutes) | 39,658 | 37,449 | 11,371 | 88,478 | 13,302 | 18,300 | 9,811 | 41,413 | ||||||||||
| See page 159 for definition of terms |
A part of Vodafone’s strategy is to build on the Group’s track record of creating value in emerging markets. Vodafone has continued to execute on this strategy, with strong performances in the Czech Republic, Egypt, Romania and South Africa.
The Group is successfully building its emerging markets portfolio through acquisitions in Turkey and, subsequent to the year end, India. Since its acquisition on 24 May 2006, Vodafone Turkey has shown a performance in excess of the acquisition plan. The Group has made a further significant step in delivering its strategic objective of delivering strong growth in emerging markets with the acquisition on 8 May 2007 of companies with interests in Hutchison Essar, a leading operator in the fast growing Indian mobile market, following which the Group controls Hutchison Essar. The Group also signed a memorandum of understanding with Bharti Airtel Limited (“Bharti Airtel”), the Group’s former joint venture in India, on infrastructure sharing and has granted an option to a Bharti group company to buy its 5.60% direct interest in Bharti Airtel. On 9 May 2007, a Bharti group company agreed to acquire the Group’s 5.60% direct interest in Bharti Airtel. Following the completion of this sale, the Group will continue to hold an indirect stake of 4.39% in Bharti Airtel.
In December 2006, the Group increased its equity interest in Vodafone Egypt from 50.1% to 54.9%, positioning the Group to capture further growth in this lower penetrated market. The Group also entered into a new strategic partnership with Telecom Egypt, the minority shareholder in Vodafone Egypt, to increase cooperation between both parties and jointly develop a range of products and services for the Egyptian market.
EMAPA’s growth has benefited from the prior year acquisitions in the Czech Republic and the stake in Bharti Airtel in India, as well as the stake increases in Romania and South Africa and the current year acquisition in Turkey. Bharti Airtel was accounted for as a joint venture until 11 February 2007, following which the Group’s interest has been accounted for as an investment.
Revenue
Total revenue increased
by 41.4%, or 21.1% on an organic basis, driven by organic service revenue
growth of 20.4% . The impact of acquisitions, disposal and exchange rates
on service revenue and total revenue growth is shown below.
| Impact of | Impact of | |||||||
| exchange | acquisitions | |||||||
| Organic | rates | and disposal | (1) | Reported | ||||
| growth | Percentage | Percentage | growth | |||||
| % | points | points | % | |||||
| Service revenue | ||||||||
| Eastern Europe | 20.0 | (5.6 | ) | 61.7 | 76.1 | |||
| Middle East, Africa and Asia | 27.7 | (17.7 | ) | 33.5 | 43.5 | |||
| Pacific | 10.0 | (7.3 | ) | – | 2.7 | |||
| EMAPA | 20.4 | (10.9 | ) | 32.8 | 42.3 | |||
| Total revenue | ||||||||
| EMAPA | 21.1 | (11.2 | ) | 31.5 | 41.4 | |||
| Note: | |
| (1) | Impact of acquisitions and disposal includes the impact of the change in consolidation status of Bharti Airtel from a joint venture to an investment. |
Organic service revenue growth was driven by the 30.2% organic increase in the average mobile customer base and the success of usage stimulation initiatives, partially offset by declining ARPU in a number of markets due to the higher proportion of lower usage prepaid customer additions.
Particularly strong customer growth was achieved in Eastern Europe and the Middle East, Africa and Asia, where markets are typically less penetrated than in Western Europe or the Pacific area.
Non-service revenue increased by 31.5%, or 28.9% on an organic basis, primarily due to an increase in the level of gross additions in a number of countries.
Eastern Europe
In Eastern Europe, service revenue
grew by 76.1%, with the key driver of growth being the acquisitions in the
Czech Republic and Turkey, as well as the stake increase in Romania. Good
customer growth in all Eastern European markets contributed to the organic
service revenue growth.
Organic service revenue growth in Eastern Europe was principally driven by Romania. As a result of the growth in the customer base and a promotional offer of lower tariffs, which led to higher voice usage, local currency service revenue in Romania grew by 29.3%, calculated by applying the Group’s current equity interest to the whole of the 2006 financial year. The continued expansion of 3G network coverage, the successful launch of 3G broadband, together with introductory promotional offers, and increased sales of Vodafone Mobile Connect data cards, resulted in data revenue growth of 64.9% in local currency.
In the Czech Republic, a focus on existing customers, including a Christmas campaign of free weekend text messages available to all existing as well as new customers, and the success of a business offering allowing unlimited on and off net calls within a customers’ virtual private network for a fixed monthly fee, had a positive impact on gross additions and drove the increase in average mobile customers. This led to growth of 11.1% in local currency service revenue, calculated by applying the Group’s current equity interest to the whole of the 2006 financial year.
Vodafone Turkey has performed ahead of the expectations the Group had at the time of the completion of the acquisition, with customer numbers, usage and adjusted operating profit ahead of plan. Improvements in network reliability and coverage have contributed to strong customer growth and allowed an increase in prepaid tariffs, resulting in service revenue growth. Telsim was rebranded to Vodafone in March 2007, with the launch of a new tariff with inclusive on and off net calls, a first for the Turkish market.
Middle East, Africa and Asia
The service revenue growth of
43.5% in the Middle East, Africa and Asia resulted primarily from the stake
increases in South Africa in February 2006 and Egypt in December 2006, together
with the acquisition of the Group’s interest in Bharti Airtel in India
in December 2005, offset by an adverse movement in exchange rates. Strong
organic growth was achieved in all markets, particularly in Egypt and South
Africa, driven by the 40.2% increase in the average mobile customer base compared
to the prior year.
Strong customer growth, driven by prepaid tariff reductions, the availability of lower cost handsets and high customer satisfaction with the Vodafone service, contributed to the 39.5% local currency service revenue growth in Egypt.
Innovative new products and services, including a new hybrid tariff offering guaranteed airtime credit every month with the ability to top up as required, and successful promotions, led to an increase in the average mobile customer base and 21.9% local currency organic service revenue growth in
| Vodafone Group Plc Annual Report 2007 | 41 |
Operating Results
continued
South Africa, whilst the continued rollout of the 3G network led to strong growth in data revenue.
Bharti Airtel continued to perform well with strong growth in customers and revenue, demonstrating the growth potential in the Indian market.
Pacific
Service revenue increased by 2.7%,
with the impact of adverse foreign exchange movements reducing reported growth
by 7.3 percentage points. In Australia, a continued focus on higher value
customers delivered local currency service revenue growth of 13.7%, with improvements
in both prepaid and contract ARPU. The performance in Australia more than
offset the reduced growth in local currency service revenue in New Zealand,
where local currency service revenue growth was 2.6% following a cut in termination
rates, which reduced reported service revenue growth by 4.1% . After the negative
impact of foreign exchange movements, reported service revenue in New Zealand
declined by 7.9%.
Adjusted operating profit
The impact of acquisitions,
disposal and exchange rates on adjusted operating profit is shown below.
| Impact of | Impact of | |||||||
| exchange | acquisitions | |||||||
| Organic | rates | and disposal | (1) | Reported | ||||
| growth | Percentage | Percentage | growth | |||||
| % | points | points | % | |||||
| Adjusted operating profit | ||||||||
| Eastern Europe | 49.2 | (7.6 | ) | (37.1 | ) | 4.5 | ||
| Middle East, Africa and Asia | 18.5 | (16.9 | ) | 31.1 | 32.7 | |||
| Pacific | 25.4 | (11.8 | ) | – | 13.6 | |||
| EMAPA | 24.3 | (7.2 | ) | (1.1 | ) | 16.0 | ||
| Note: | |
| (1) | Impact of acquisitions and disposal includes the impact of the change in consolidation status of Bharti Airtel from a joint venture to an investment |
Adjusted operating profit increased by 16.0% . On an organic basis, growth was 24.3%, as the acquisitions and stake increases led to the rise in acquired intangible asset amortisation reducing reported growth in operating profit. These acquisitions, combined with the continued expansion of network infrastructure in the region, including 3G and HSDPA upgrades, resulted in higher depreciation charges. Organic growth in adjusted operating profit was driven by a strong performance in Romania, Egypt, South Africa and the Group’s associated undertaking in the US.
Eastern Europe
Interconnect costs increased by
46.3%, or 23.8% on an organic basis, principally as a result of the higher
usage in Romania. An ongoing regulatory fee in Turkey amounting to 15% of
revenue has increased other direct costs compared to the 2006 financial year.
Acquisition costs fell as a percentage of service revenue throughout most of Eastern Europe, with increased investment in the direct distribution channel in Romania resulting in lower subsidies on handsets. Retention costs decreased as a percentage of service revenue, but increased on an organic basis due to a focus on retaining customers through loyalty programmes in response to the increasing competition in Romania, which had a positive impact on contract and prepaid churn.
Operating expenses increased by 1.0 percentage point as a percentage of service revenue, primarily as a result of inflationary pressures in Romania and investment in Turkey.
Middle East, Africa and Asia
Interconnect costs increased by
45.0%, or 26.8% on an organic basis, due to the usage stimulation initiatives
throughout the region.
Acquisition costs remained stable as a percentage of service revenue, whilst retention costs increased, principally due to increased investment in retaining customers in Egypt ahead of the forthcoming launch of services by a new operator and in South Africa in response to the introduction of mobile number portability during the year, with the provision of 3G and data
enabled device upgrades for contract customers and a loyalty point scheme. Operating expenses remained stable as a percentage of service revenue.
Pacific
The improved profitability in
Australia was more than offset by the lower profitability in New Zealand resulting
from the increased cost of telecommunications service obligation regulation,
the impact of the acquisition of ihug and adverse foreign exchange rates.
Acquisition and retention costs increased as a percentage of service revenue due to the investment in higher value customers in Australia, which also had a favourable impact on contract churn and were partially offset by savings in network costs and operating expenses.
Associates
| 2007 | % change | ||||||||||
| Verizon | Verizon | ||||||||||
| Wireless | Other | Total | Wireless | ||||||||
| Share of result of associates | £m | £m | £m | £ | $ | ||||||
| Operating profit | 2,442 | 940 | 3,382 | 15.6 | 22.9 | ||||||
| Interest | (179 | ) | (27 | ) | (206 | ) | (12.3 | ) | (7.0 | ) | |
| Tax | (125 | ) | (271 | ) | (396 | ) | 7.8 | 14.6 | |||
| Minority interest | (61 | ) | – | (61 | ) | 1.7 | 6.7 | ||||
| 2,077 | 642 | 2,719 | 19.9 | 27.6 | |||||||
| 2006 | ||||||
| Verizon | ||||||
| Wireless | Other | Total | ||||
| Share of result of associates | £m | £m | £m | |||
| Operating profit | 2,112 | 1,010 | 3,122 | |||
| Interest | (204 | ) | (23 | ) | (227 | ) |
| Tax | (116 | ) | (329 | ) | (445 | ) |
| Minority interest | (60 | ) | 8 | (52 | ) | |
| 1,732 | 666 | 2,398 | ||||
| % change | |||||||||
|
|
|||||||||
| Verizon | |||||||||
| Wireless | |||||||||
| Verizon Wireless (100% basis) | 2007 | 2006 | £ | $ | |||||
| Total revenue (£m) | 20,860 | 18,875 | 10.5 | 17.4 | |||||
| Closing customers (’000) | 60,716 | 53,020 | |||||||
| Average monthly ARPU ($) | 52.5 | 51.4 | |||||||
| Blended churn (%) | 13.9% | 14.7% | |||||||
| Mobile non-voice service revenue | |||||||||
| as a percentage of mobile service | |||||||||
| revenue (%) | 14.4% | 8.9% | |||||||
Verizon Wireless produced another year of record growth in organic net additions, increasing its customer base by 7.7 million in the year ended 31 March 2007. The performance was particularly robust in the higher value contract segment and was achieved in a market where the estimated closing mobile penetration reached 80%.
The strong customer growth was achieved through a combination of higher gross additions and improvements in Verizon Wireless’s customer loyalty, with the latter evidenced through lower levels of churn. The 15.4% growth in the average mobile customer base combined with a 2.1% increase in ARPU resulted in a 17.8% increase in service revenue. ARPU growth was achieved through the continued success of data services, driven predominantly by data cards, wireless e-mail and messaging services. Verizon Wireless’s operating profit also improved due to efficiencies in other direct costs and operating expenses, partly offset by a higher level of customer acquisition and retention activity.
Verizon Wireless continued to lay the foundations for future data revenue growth through the launch of both CDMA EV-DO Rev A, an enhanced wireless broadband service, and broadcast mobile TV services during the first calendar quarter of 2007. In addition, Verizon Wireless consolidated its spectrum position during the year with the acquisition of spectrum through the FCC’s Advanced Wireless Services auction for $2.8 billion.
| 42 | Vodafone Group Plc Annual Report 2007 |
| Performance | |
The Group’s share of the tax attributable to Verizon Wireless for the year ended 31 March 2007 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.
In a patent infringement action before the United States International Trade Commission (ITC) entitled Baseband Processor Chips and Chipsets, Transmitter and Receiver (Radio) Chips, Power Control Chips, and Products Containing Same, Including Cellular Telephone Handsets, Broadcom Corporation was seeking to bar the importation of certain chips and chip sets manufactured by Qualcomm Corporation and wireless devices containing those chips and chipsets. All major U.S. wireless carriers, including Verizon Wireless, use Qualcomm chips to some degree.
On 7 June 2007, the ITC issued a “limited exclusion order” that bars the import of infringing chips and chipsets manufactured by or on behalf of Qualcomm and certain wireless communication devices containing an infringing chip. Companies may continue to import handheld wireless communications devices that are the same models as handheld wireless communications devices that were being imported for sale to the general public on or before 7 June 2007 and wireless communications devices that do not contain a chip that is programmed to infringe. The order will go into effect in 60 days unless it is disapproved by the President of the United States or stayed by the ITC or U.S. Court of Appeals for the Federal Circuit.
The effect of the order on the range of new models of handsets that will be available to Verizon Wireless’s customers in the future will depend upon the extent of the order’s applicability to Verizon Wireless, the extent to which reviewing authorities permit the order to take effect in its current form, and Qualcomm’s ability to provide non-infringing products or alternatives.
Qualcomm and other parties, including Verizon Wireless, have moved for a stay pending appeal. On 11 June 2007, the U.S. Court of Appeals for the Federal Circuit ordered the ITC to rule within 10 days on the stay motions, and if it denies those motions, to file a brief with the court by 27 June in response to the stay motions.
The Group’s other associated undertakings in EMAPA have been impacted by intense competition and reduction in termination rates, similar to the experiences of the Group’s controlled businesses in the Europe region, which have had a negative impact on revenue. The Group disposed of its associated undertakings in Belgium and Switzerland on 3 November 2006 and 20 December 2006, respectively, for a total cash consideration of £3.1 billion. Results are included until the respective dates of the announcement of disposal.
SFR, the Group’s associated undertaking in France, achieved an increase of 3.5% in its customer base, higher voice usage and strong growth in data services. However, service revenue was stable in local currency as the impact of these items was offset by a 5.7% decline in ARPU due to the increase in competition and significant termination rate cuts imposed by the regulator. The voice termination rate was cut by 24% to 9.5 eurocents per minute with effect from 1 January 2006 and by a further 21% to 7.5 eurocents per minute with effect from 1 January 2007. France is the first European Union country to impose regulation on SMS termination rates, which were cut by 19% with effect from 1 January 2006 and a further 30% with effect from mid September 2006 to 3 eurocents per SMS.
With effect from July 2007, SFR will be governed by the Europe regional management team. Accordingly, for the 2008 financial year onwards SFR will be reported as part of the Europe region.
Investments
China Mobile, in which
the Group has a 3.27% stake and is accounted for as an investment, increased
its customer base by 21.3% in the period to 316.1 million. Dividends of £57
million were received by the Group in the 2007 financial year.
Common functions
| 2007 | 2006 | Change | |||||
| £m | £m | % | |||||
| Revenue | 168 | 145 | 15.9 | ||||
| Other direct costs | (66 | ) | – | – | |||
| Operating expenses | 206 | 130 | 58.5 | ||||
| Depreciation and amortisation | (181 | ) | (72 | ) | 151.4 | ||
| Share of result in associated undertakings | 1 | 8 | (87.5 | ) | |||
| Adjusted operating profit | 128 | 211 | (39.3 | ) | |||
Common functions represent the results of Partner Markets and the net result of central Group costs less charges to the Group’s operations. Adjusted operating profit has been impacted in the 2007 financial year by restructuring costs incurred in the central functions, principally marketing and technology, which amounted to £36 million.
| Vodafone Group Plc Annual Report 2007 | 43 |
Operating Results
continued
2006 Financial Year Compared to 2005 Financial Year
Group
| Common | 2006 | 2005 | % change | |||||||||||||
| Europe | EMAPA | Functions | Eliminations | Group | Group | |||||||||||
| £m | £m | £m | £m | £m | £m | £ | Organic | |||||||||
| Voice revenue | 17,827 | 3,636 | – | (58 | ) | 21,405 | 19,782 | 8.2 | 5.4 | |||||||
| Messaging revenue(1) | 2,836 | 454 | – | (1 | ) | 3,289 | 2,925 | 12.4 | 9.8 | |||||||
| Data revenue(1) | 1,023 | 86 | – | (11 | ) | 1,098 | 727 | 51.0 | 51.8 | |||||||
| Fixed line operators and DSL revenue | 1,271 | 19 | – | – | 1,290 | 1,044 | 23.6 | 20.5 | ||||||||
| Total service revenue | 22,957 | 4,195 | – | (70 | ) | 27,082 | 24,478 | 10.6 | 7.9 | |||||||
| Acquisition revenue | 1,018 | 277 | – | – | 1,295 | 1,263 | ||||||||||
| Retention revenue | 434 | 14 | – | – | 448 | 393 | ||||||||||
| Other revenue | 324 | 68 | 145 | (12 | ) | 525 | 544 | |||||||||
| Total revenue | 24,733 | 4,554 | 145 | (82 | ) | 29,350 | 26,678 | 10.0 | 7.5 | |||||||
| Interconnect costs | (3,739 | ) | (794 | ) | – | 70 | (4,463 | ) | (3,991 | ) | 11.8 | 8.3 | ||||
| Other direct costs | (1,666 | ) | (442 | ) | – | 12 | (2,096 | ) | (1,859 | ) | 12.7 | 10.2 | ||||
| Acquisition costs | (2,501 | ) | (467 | ) | – | – | (2,968 | ) | (2,819 | ) | 5.3 | 3.4 | ||||
| Retention costs | (1,752 | ) | (139 | ) | – | – | (1,891 | ) | (1,627 | ) | 16.2 | 15.5 | ||||
| Operating expenses | (5,243 | ) | (1,053 | ) | 130 | – | (6,166 | ) | (5,649 | ) | 9.2 | 6.3 | ||||
| Acquired intangibles amortisation | (2 | ) | (155 | ) | – | – | (157 | ) | – | |||||||
| Purchased licence amortisation | (884 | ) | (63 | ) | – | – | (947 | ) | (918 | ) | ||||||
| Depreciation and other amortisation | (3,000 | ) | (602 | ) | (72 | ) | – | (3,674 | ) | (3,446 | ) | |||||
| Share of result in associates | 5 | 2,398 | 8 | – | 2,411 | 1,984 | ||||||||||
| Adjusted operating profit | 5,951 | 3,237 | 211 | – | 9,399 | 8,353 | 12.5 | 11.8 | ||||||||
| Adjustments for: | ||||||||||||||||
| – Impairment losses | (23,515 | ) | – | – | – | (23,515 | ) | (475 | ) | |||||||
| – Other income and expense | 3 | – | 12 | – | 15 | – | ||||||||||
| – Non-operating income of associates | – | 17 | – | – | 17 | – | ||||||||||
| Operating loss | (17,561 | ) | 3,254 | 223 | – | (14,084 | ) | 7,878 | ||||||||
| Non-operating income and expense | (2 | ) | (7 | ) | ||||||||||||
| Investment income | 353 | 294 | ||||||||||||||
| Financing costs | (1,120 | ) | (880 | ) | ||||||||||||
| Profit/(loss) before taxation | (14,853 | ) | 7,285 | |||||||||||||
| Income tax expense | (2,380 | ) | (1,869 | ) | ||||||||||||
| (Loss)/profit for the financial year from | ||||||||||||||||
| continuing operations | (17,233 | ) | 5,416 | |||||||||||||
| (Loss)/profit for the financial year from | ||||||||||||||||
| discontinued operations | (4,588 | ) | 1,102 | |||||||||||||
| (Loss)/profit for the financial year | (21,821 | ) | 6,518 | |||||||||||||
| Note: | |
| (1) | Certain revenue relating to content delivered by SMS and MMS has been reclassified from messaging revenue to data revenue to provide a fairer presentation of messaging and data revenue. |
Revenue
Total revenue increased
by 10.0%, or 7.5% on an organic basis, for the year to 31 March 2006 due to
a 7.9% increase in service revenue on an organic basis offset by lower growth
in other revenue. Service revenue growth reflected a 15.2% organic increase
in the average customer base of the controlled mobile networks and the Group’s
share of jointly controlled mobile networks, offset by the impact of lower
ARPU in a number of the Group’s markets. Competitive pressures have intensified
following a significant number of new market entrants and greater competition
from incumbents, specifically in the mature markets of the Europe Region.
Many of these markets have penetration rates over 100% which, together with
termination rate cuts and a higher proportion of lower spending prepaid customers
across the Group, have led to the decline in ARPU.
Voice revenue increased by 8.2%, or by 5.4% on an organic basis, due to the growth in average customers and a successful usage stimulation programme leading to a 24.6% growth in total minutes, offset by tariff declines from competition and termination rate cuts. Revenue from outgoing calls was the primary driver of voice revenue growth, whilst incoming voice revenue increased marginally as a significant increase in the proportion of incoming calls from other mobile networks was offset by the impact of termination rate cuts, particularly in the second half of the 2006 financial year.
Messaging revenue rose by 12.4%, or 9.8% on an organic basis, as an increase in the average customer base and the number of messages sent per customer was offset by tariff declines.
The success of 3G, Vodafone live! and offerings in the business segment, including Vodafone Mobile Connect data cards and BlackBerry from Vodafone, were the main contributors to a 51.0% increase, or 51.8% on an organic basis, in data revenue. An additional 6,321,000 3G devices were registered on the Group’s networks in the 2006 financial year, bringing the total to 7,721,000 at 31 March 2006, including 660,000 business devices such as Vodafone Mobile Connect 3G/GPRS data cards. Prior to the announcement of the disposal of Vodafone Japan in March 2006, the Group registered its ten millionth consumer 3G device, when including 100% of the devices in Italy.
Fixed line operators and DSL revenue rose by 23.6%, primarily a result of Arcor, driven by customer and usage growth, partly offset by tariff decreases in the competitive market.
Acquisition, retention and other revenue increased to £2,268 million, principally due to growth in revenue related to acquisition and retention activities in Spain, partially offset by a reduction in other revenue, resulting principally from a fall in the number of customers connected to non-Vodafone networks in the UK. A 32.5% rise in the number of gross mobile customer additions, partially offset by a fall in the average revenue for handset sales to new prepaid customers and a 24.3% increase in the number of upgrades, led to a 5.3% growth in revenue related to acquisition and retention activities to £1,743 million.
| 44 | Vodafone Group Plc Annual Report 2007 |
| Performance | |
Adjusted operating profit
Adjusted operating profit increased
by 12.5% to £9,399 million, comprising organic growth of 11.8%, favourable
exchange rate movements of 1.1% partly offset by a 0.4% decline due to the
acquisition and disposal activity during the year.
Interconnect costs increased by 8.3% on an organic basis, as strong growth in outgoing voice usage was partially offset by cuts in termination rates in a number of markets and an increased proportion of outgoing traffic being to other Vodafone customers, which did not result in interconnect expense. The rise in the number of upgrades and the increased cost of upgrading customers to 3G were the primary contributors to a 7.7% organic growth in acquisition and retention costs, to £4,859 million. Operating expenses as a percentage of service revenue for the 2006 financial year were comparable to the 2005 financial year at 22.8%.
The charge relating to the amortisation of acquired intangible assets was £157 million following acquisitions in the Czech Republic, India, Romania and South Africa in the 2006 financial year. Depreciation and other amortisation increased, principally due to the net impact of the acquisitions and disposal in the 2006 financial year and the ongoing expansion of 3G networks.
The Group’s share of the results in associated undertakings, before amounts related to business acquisitions and disposals, grew by 21.5% after the deduction of interest, tax and minority interest, primarily due to growth at Verizon Wireless in the US. The Group’s share of the result in Verizon Wireless increased by 25.5% to £2,112 million, before deduction of interest, tax and minority interest, with a particularly strong performance in the second half of the 2006 financial year.
Impairment losses
The Group recorded an impairment
charge to the carrying value of goodwill in the 2006 financial year of £23,515
million in respect of the Group’s operations in Germany (£19,400
million) and Italy (£3,600 million) reflecting a revision of the Group’s
view of the prospects for these businesses, particularly in the medium to
long term, and a further £515 million in respect of the Swedish business
following the announcement of its disposal. An impairment loss was recognised
in the 2005 financial year of £475 million in respect of the Group’s
Swedish operations and reflected fierce competition along with onerous 3G
licence obligations.
Investment income and financing costs
| 2006 | 2005 | Change | ||||
| £m | £m | % | ||||
| Net financing costs before dividends | ||||||
| from investments | (318 | ) | (293 | ) | 8.5 | |
| Potential interest charges arising on | ||||||
| settlement of outstanding tax issues | (329 | ) | (245 | ) | 34.3 | |
| Changes in the fair value of equity put | ||||||
| rights and similar arrangements | (161 | ) | (67 | ) | 140.3 | |
| Dividends from investments | 41 | 19 | 115.8 | |||
| Net financing costs | (767 | ) | (586 | ) | 30.9 | |
Net financing costs before dividends from investments increased by 8.5% to £318 million as an increase in average net debt compared to the 2005 financial year was partially offset by gains on mark to market adjustments on financial instruments in the 2006 financial year.
Potential interest charges arising on the settlement of outstanding tax issues represents the Group’s estimate of any interest that may be due to tax authorities when the issues are settled. This charge varies due to the interest rates applied by the tax authorities, the timing of tax payments and the status of discussions on tax issues with the relevant tax authorities. At 31 March 2006, the provision for potential interest charges arising on settlement of outstanding tax issues was £896 million.
The change in the fair value of equity put rights and similar arrangements comprised the fair value movement in relation to the potential put rights held by Telecom Egypt over its 25.5% interest in Vodafone Egypt and the fair
value of a financial liability in relation to the minority partners of Arcor, the Group’s non-mobile operation in Germany. Further details in respect of these arrangements are provided in the section titled “Performance – Financial Position and Resources” and in note 24 to the Consolidated Financial Statements.
Taxation
The effective tax rate
for the year to 31 March 2006 was (16.0)% compared to 25.7% for the 2005 financial
year. The negative effective tax rate arose as a result of the £23,515
million impairment losses recognised in the 2006 financial year. These losses
were not expected to be deductible for tax purposes so were not expected to
create a future benefit. The effective tax rate, exclusive of the impairment
losses, was 27.5% for the 2006 financial year, which is lower than the Group’s
weighted average tax rate as a result of the repurchase of shares in Vodafone
Italy and favourable tax settlements, but had increased compared to the 2005
financial year as the 2005 financial year benefited from finalising the reorganisation
of the Group’s German operations.
Basic loss per share
Basic earnings per share
from continuing operations fell from 8.12 pence to a loss per share of 27.66
pence for the 2006 year. The basic loss per share was after a charge of 37.56
pence per share in relation to an impairment of the carrying value of goodwill,
a further charge of 0.26 pence per share for the change in fair value of equity
put rights and similar arrangements, and a credit of 0.05 pence per share
for amounts relating to business acquisitions and disposals.
(Loss)/profit for the financial year from discontinued operations
| 2006 | 2005 | Change | ||||
| £m | £m | % | ||||
| Revenue | 7,268 | 7,395 | (1.7 | ) | ||
| Adjusted operating profit | 455 | 664 | ||||
| Impairment loss | (4,900 | ) | – | |||
| Operating (loss)/profit | (4,445 | ) | 664 | |||
| Non-operating income and expense | – | 13 | ||||
| Net financing costs | (3 | ) | (11 | ) | ||
| (Loss)/profit before taxation | (4,448 | ) | 666 | |||
| Income tax (expense)/income(1) | (140 | ) | 436 | |||
| (Loss)/profit for the financial year | (4,588 | ) | 1,102 | |||
| Note: | |
| (1) | Included a deferred tax credit of £599 million in the year to 31 March 2005 in respect of losses in Vodafone Holdings K.K. which became eligible for offset against profits of Vodafone K.K. following the merger of the two entities on 1 October 2004. |
On 17 March 2006, the Group announced that an agreement had been reached to sell its 97.68% 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. The disposal was completed on 27 April 2006.
Following the announcement on 17 March 2006, the Group recognised an impairment loss of £4,900 million in respect of Vodafone Japan. The recoverable amount of Vodafone Japan was determined as the fair value less costs to sell.
| Vodafone Group Plc Annual Report 2007 | 45 |
continued
Europe
| % change | ||||||||||||||||||||
| Germany | Italy | Spain | UK | Arcor | Other | Eliminations | Europe | |||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £ | Organic | |||||||||||
| Year ended 31 March 2006 | ||||||||||||||||||||
| Voice revenue | 4,304 | 3,472 | 3,093 | 3,642 | – | 3,672 | (356 | ) | 17,827 | 2.3 | 3.2 | |||||||||
| Messaging revenue | 815 | 526 | 328 | 674 | – | 507 | (14 | ) | 2,836 | 7.2 | 7.6 | |||||||||
| Data revenue | 275 | 172 | 194 | 252 | – | 170 | (40 | ) | 1,023 | 46.4 | 48.8 | |||||||||
| Fixed line operator and DSL revenue | – | – | – | – | 1,305 | – | (34 | ) | 1,271 | 21.7 | 16.7 | |||||||||
| Total service revenue | 5,394 | 4,170 | 3,615 | 4,568 | 1,305 | 4,349 | (444 | ) | 22,957 | 5.2 | 5.9 | |||||||||
| Acquisition revenue | 185 | 94 | 269 | 285 | 15 | 170 | – | 1,018 | ||||||||||||
| Retention revenue | 61 | 84 | 105 | 60 | – | 124 | – | 434 | ||||||||||||
| Other revenue | 114 | 15 | 6 | 135 | – | 54 | – | 324 | ||||||||||||
| Total revenue | 5,754 | 4,363 | 3,995 | 5,048 | 1,320 | 4,697 | (444 | ) | 24,733 | 4.7 | 5.6 | |||||||||
| Interconnect costs | (732 | ) | (681 | ) | (634 | ) | (862 | ) | (368 | ) | (906 | ) | 444 | (3,739 | ) | 4.9 | 4.8 | |||
| Other direct costs | (281 | ) | (241 | ) | (329 | ) | (355 | ) | (187 | ) | (273 | ) | – | (1,666 | ) | 6.5 | 7.0 | |||
| Acquisition costs | (551 | ) | (172 | ) | (543 | ) | (665 | ) | (147 | ) | (423 | ) | – | (2,501 | ) | 1.9 | 2.7 | |||
| Retention costs | (410 | ) | (177 | ) | (354 | ) | (455 | ) | - | (356 | ) | – | (1,752 | ) | 14.4 | 15.9 | ||||
| Operating expenses | (1,077 | ) | (822 | ) | (762 | ) | (1,088 | ) | (390 | ) | (1,104 | ) | – | (5,243 | ) | 8.1 | 9.3 | |||
| Acquired intangibles amortisation | – | – | – | – | – | (2 | ) | – | (2 | ) | ||||||||||
| Purchased licence amortisation | (342 | ) | (74 | ) | (69 | ) | (333 | ) | – | (66 | ) | – | (884 | ) | ||||||
| Depreciation and other amortisation | (865 | ) | (524 | ) | (336 | ) | (592 | ) | (89 | ) | (594 | ) | – | (3,000 | ) | |||||
| Share of result in associates | – | – | – | – | – | 5 | – | 5 | ||||||||||||
| Adjusted operating profit | 1,496 | 1,672 | 968 | 698 | 139 | 978 | - | 5,951 | 2.7 | 3.5 | ||||||||||
| Year ended 31 March 2005 | ||||||||||||||||||||
| Voice revenue | 4,358 | 3,492 | 2,558 | 3,672 | – | 3,673 | (329 | ) | 17,424 | |||||||||||
| Messaging revenue | 774 | 467 | 269 | 671 | – | 466 | (2 | ) | 2,645 | |||||||||||
| Data revenue | 188 | 132 | 136 | 155 | – | 119 | (31 | ) | 699 | |||||||||||
| Fixed line operator and DSL revenue | – | – | – | – | 1,090 | – | (46 | ) | 1,044 | |||||||||||
| Total service revenue | 5,320 | 4,091 | 2,963 | 4,498 | 1,090 | 4,258 | (408 | ) | 21,812 | |||||||||||
| Acquisition revenue | 186 | 108 | 221 | 322 | 5 | 200 | – | 1,042 | ||||||||||||
| Retention revenue | 56 | 60 | 75 | 68 | – | 130 | – | 389 | ||||||||||||
| Other revenue | 122 | 14 | 2 | 177 | – | 56 | – | 371 | ||||||||||||
| Total revenue | 5,684 | 4,273 | 3,261 | 5,065 | 1,095 | 4,644 | (408 | ) | 23,614 | |||||||||||
| Interconnect costs | (734 | ) | (701 | ) | (540 | ) | (771 | ) | (334 | ) | (894 | ) | 408 | (3,566 | ) | |||||
| Other direct costs | (314 | ) | (232 | ) | (263 | ) | (367 | ) | (119 | ) | (270 | ) | – | (1,565 | ) | |||||
| Acquisition costs | (534 | ) | (179 | ) | (467 | ) | (710 | ) | (113 | ) | (452 | ) | – | (2,455 | ) | |||||
| Retention costs | (386 | ) | (134 | ) | (247 | ) | (459 | ) | - | (305 | ) | – | (1,531 | ) | ||||||
| Operating expenses | (1,071 | ) | (747 | ) | (608 | ) | (1,049 | ) | (360 | ) | (1,016 | ) | – | (4,851 | ) | |||||
| Acquired intangibles amortisation | – | – | – | – | – | – | – | – | ||||||||||||
| Purchased licence amortisation | (342 | ) | (74 | ) | (69 | ) | (333 | ) | – | (65 | ) | – | (883 | ) | ||||||
| Depreciation and other amortisation | (830 | ) | (512 | ) | (292 | ) | (597 | ) | (105 | ) | (634 | ) | – | (2,970 | ) | |||||
| Adjusted operating profit | 1,473 | 1,694 | 775 | 779 | 64 | 1,008 | – | 5,793 | ||||||||||||
| Change at constant exchange rates | % | % | % | % | % | % | ||||||||||||||
| Voice revenue | (1.3 | ) | (0.7 | ) | 20.9 | (0.8 | ) | – | 0.2 | |||||||||||
| Messaging revenue | 5.2 | 12.7 | 22.0 | 0.4 | – | 9.0 | ||||||||||||||
| Data revenue | 47.0 | 29.9 | 43.7 | 62.6 | – | 42.9 |