Vodafone Q1 FY15-16 Results

Highlights:

- Q1 Group organic service revenue grew 0.8%*; Europe -1.5%*, AMAP 6.1%*

- Continued recovery in Europe: Germany -1.2%*, UK 0.2%*, Italy -2.0%*, Spain -5.5%*

- Momentum in AMAP, South Africa back to growth: India 6.9%*, Vodacom 4.5%*, Turkey 15.0%*

- Strong progress on Project Spring, mobile build 71% complete, European 4G coverage 75%

- 24.1 million 4G customers across 18 markets

- Progress in unified communications: 12.3 million fixed broadband customers, launched broadband in UK

- Second consecutive quarter of enterprise growth, service revenue +1.8%*

Vittorio Colao, Group Chief Executive, commented: “We have made a good start to the year. Our emerging markets have maintained their strong momentum and more of our European businesses are returning to growth, as customer demand for 4G and data takes off. We continue to hit our Project Spring build milestones and customers are beginning to value the improvement in service that is resulting: contract churn in Europe is now falling and mobile ARPU trends are stabilising in a number of key markets. Our other key growth areas – unified communications and enterprise – are performing strongly, benefiting from the increased capabilities and footprint that our higher levels of investment are delivering. However, our markets are, as always, highly competitive and we therefore have to remain very focused on efficiency, cost control, and excellent value and service to customers, while continuing to deliver a good return for shareholders.”

OPERATING REVIEW

Group performance

Group total revenue was £10.1 billion and Group service revenue was £9.2 billion. Total revenue declined 0.9%, including a 3.1 percentage point favourable impact from M&A and a 7.3 percentage point adverse impact from foreign exchange movements. On an organic basis Group service revenue increased 0.8%* (Q4: 0.1%*) and, excluding the impact of mobile termination rate (‘MTR’) cuts, Group service revenue grew 1.4%* (Q4: 0.9%*).

Europe

In Europe, organic service revenue has continued to recover, declining 1.5%* (Q4: -2.6%*), supported by more stable pricing environments in many markets and an improved commercial performance, as well as a positive impact from the inclusion of KDG and Ono in organic growth rates. Excluding the impact of MTR cuts, organic service revenue declined by 1.3%* (Q4: -2.2%*).

Trends in mobile continue to improve with Q1 mobile service revenue declining 2.5%* (Q4: -3.4%*) supported by continued growth in our contract base, further ARPU stabilisation across many markets and a continued reduction in contract churn across all major markets. Data usage continues to increase significantly, led by the take up of 4G, with 18.9 million 4G customers across Europe. Fixed service revenue trends continue to be strong with growth of 1.7%* (Q4: 1.2%*) driven by continued customer growth.

Total revenue declined 3.9%, including a 4.3 percentage point favourable impact from M&A, primarily from Ono, and a 9.3 percentage point adverse impact from foreign exchange movements.

Germany

Service revenue, including KDG, declined 1.2%* (Q4 excluding KDG: -3.5%*), with continued customer growth more than offset by a decline in contract ARPU. The quarter’s organic growth rate benefits from the inclusion of KDG.

Mobile service revenue declined 2.1%* (Q4: -3.2%*), with price reductions in prior periods continuing to penetrate the customer base. We continued to grow our contract base, with 104,000 customers added in the quarter (Q4: 137,000) and contract churn has fallen to its lowest level in three years at 13.8%. The channel mix for new customer additions is also improving, with an increasing proportion of new customer additions coming from direct channels. We increased our 4G coverage to 78% and now have 5.5 million 4G customers. During the quarter we acquired 110MHz of spectrum across four bands for €2.1 billion, which will improve our competitive position by enabling us to offer even faster 4G speeds.

Fixed service revenue (including KDG) grew 0.2%* (Q4 excluding KDG: -4.8%*) with continued growth in KDG offset by a decline in our DSL business, where promotional discounts for new customers continue to impact ARPU in the promotional period. In total, we added 70,000 broadband customers in the quarter.

KDG continued to perform strongly with service revenue growth of 6.6%*, supported by continued customer growth with 102,000 broadband net additions (Q4: 123,000). The integration of KDG remains on track, with further progress on network integration and customer migrations.

Italy

Service revenue declined 2.0%* (Q4: -4.1%), with the improving trend reflecting a more stable prepaid market as well as continued growth in enterprise and fixed line.

Mobile service revenue declined 3.2%* (Q4: -6.3%*) with an improving trend supported by growth in enterprise and a significant improvement in prepaid, led by ARPU growth and churn reduction. Our 4G network now provides 88% outdoor coverage and we have 2.7 million 4G customers, with data usage continuing to grow and the number of customers with data add-ons more than doubling year over year.

Fixed service revenue grew 4.4%* (Q4: 8.9%*), supported by broadband net additions of 43,000. Our fibre-to-thecabinet programme has now installed over 8,600 street cabinets across 74 cities with over 3,500 added in the quarter.

UK

UK service revenue increased 0.2%* (Q4: -0.6%*), supported by a continued strong performance in mobile consumer contract.

Mobile service revenue increased 0.7%* (Q4: 1.1%*) with growth in both consumer contract and enterprise. In consumer, we added 83,000 new contract customers (Q4: 49,000) and reduced contract churn to 15.8%, both supported by the continued popularity of our 4G plans with content. We now have 4.7 million 4G customers with 4G outdoor population coverage now at 68% (or 76% based on the Ofcom definition), including complete coverage across London.

Fixed service revenue, which is currently all enterprise related, continued to record an improving trend with service revenue declining 1.3%* (Q4: -5.7%*) though price pressures remain. During the quarter we launched our consumer broadband offer, initially in selected regions, and will launch nationwide services during the summer, with a full TV launch to follow before the financial year end.

Spain

Service revenue, including Ono, declined 5.5%* (Q4 excluding Ono: -7.8%*), reflecting continued price competition across converged bundles. Excluding the impact of handset financing, service revenue declined 3.3%*. The quarter’s organic growth rate benefits from the inclusion of Ono.

Mobile service revenue, including Ono, declined 9.5%* (Q4 excluding Ono: -9.3%*) with lower mobile ARPU reflecting price reductions in previous quarters and the impact of handset financing, partially offset by new prices introduced in the previous quarter. We continue to grow our contract base, adding 54,000 contract customers in the quarter. We now have 3.3 million customers enjoying our 4G services with outdoor population coverage now 78%.

Fixed service revenue, including Ono, grew 4.2%* (Q4 excluding Ono: 5.8%*), supported by net broadband customer additions of 41,000. We added 80,000 new cable and fibre customers in the quarter. We now cover 7.9 million households with cable or fibre, including 1.1 million homes through our joint fibre build with Orange. The performance of Ono remains in line with our expectations and cost and capex synergies from the integration continue to be achieved. During the quarter, we launched Vodafone One, a fully integrated offer with Ono, and now have 291,000 customers on these plans

Other Europe

Service revenue grew 0.6%* (Q4: -0.9%*), with the majority of markets now in growth. The Netherlands grew service revenue by 1.0%* (Q4: 3.2%*) with mobile customer growth and growth in fixed line offsetting some pressure in mobile ARPU. In Ireland, service revenue declined 0.1%* (Q4: -6.4%*) with growth in the consumer contract and enterprise mobile businesses, plus strong growth in fixed line, offset by a decline in prepaid mobile. In Portugal, service revenue declined 2.6%* (Q4: -3.8%*) reflecting continued converged price competition. Greece returned to growth with service revenue increasing 0.4%* (Q4: -2.0%) mainly as a result of strong customer growth. Romania also returned to service revenue growth, after lapping an MTR cut, and we saw continued growth in the Czech Republic and a small decline in Hungary, after a significant MTR cut.

AMAP

Our AMAP region continues to grow strongly, with service revenue increasing 6.1%* (Q4: 5.8%*) with growth in all major markets. Excluding the impact of MTR cuts, organic service revenue increased 7.7%* (Q4: 7.3%*). The region continues to see strong customer growth, with 4.3 million added in the quarter, and an increasing number of our customers are now using data, with 6.6 million active data users added in the quarter. Customer usage continues to grow throughout the region, with voice and data usage up 7% and 97% respectively.

Total revenue increased 5.5%, including a 2.5 percentage point adverse impact from foreign exchange movements.

India

Service revenue increased 6.9%* (Q4: 11.7%*), with the growth rate slowing due to the impact of regulation, including an MTR cut. Excluding MTRs, service revenue grew by 10.6%* (Q4: 13.2%*), with continued customer base growth and an acceleration in the take-up of 3G offsetting continued pressure on voice pricing.

Data revenue grew 65% supported by the addition of 3.1 million new data customers, taking the total to 66.8 million. Smartphone penetration is now 26% across the country and 47% in the four metro circles and we now have 22 million 3G customers compared to 10 million a year ago. While total voice traffic continues to grow, the outgoing rate per minute has continued to decline, reflecting increased competition. The average minutes of use per customer is lower than a year ago but has increased slightly compared to the previous quarter. Total mobile customers increased 1.6 million giving a closing customer base of 185.4 million.

Progress on Project Spring remains strong with 1,000 2G sites and 1,100 3G sites added in the quarter (14,000 2G and 21,000 3G since the build commenced), taking our 3G outdoor population coverage in targeted urban areas to 91%. We are now trialling 4G services across selected areas and we continue to expand our M-Pesa service and now have 501,000 active customers supported by 94,000 agents.

Vodacom

Service revenue grew 4.5%* (Q4: -0.2%*), with a return to growth following the lapping of MTR cuts in the previous year combined with an improved underlying performance in South Africa and across the international operations.

South Africa returned to growth with service revenue growing 2.8%* (Q4: -2.0%) with the improvement the result of lapping an MTR cut combined with strong data growth, supported by increased take up of data bundles. Data revenue increased 35% with a 46% increase in data traffic. Continued network leadership and an emphasis on customer retention has helped contract churn fall to 7.2%. Project Spring continues to progress well with 4G outdoor population coverage at 41% and 82% of all mobile sites now connected with high capacity backhaul.

Vodacom obtained approval for the Neotel transaction from the Independent Communications Authority (ICASA), and the Competition Commission of South Africa has recommended the approval of the transaction to the Competition Tribunal, both of which are subject to certain conditions. We await the outcome of the Competition Tribunal and the ICASA public commentary processes.

Vodacom’s international operations outside South Africa grew service revenue by 10.7%* (Q4: 5.3%*) with quarterly revenue trends improving across all countries, supported by strong customer and data revenue growth. M-Pesa continues to perform well, with over 5.6 million customers actively using the service across Vodacom’s international operations

Other AMAP

Service revenue increased 6.8%* (Q4: 5.5%*), with strong growth in Turkey, Egypt and Ghana partially offset by declines in New Zealand and Qatar.

Service revenue in Turkey grew 15.0%* (Q4: 13.0%*) reflecting continued strong growth in both consumer contract and enterprise as well as an increased contribution from fixed line. Total mobile customers reached 21.0 million with 310,000 contract customers added in the quarter. In Egypt, service revenue grew 6.1%* (Q4: 3.4%*) with strong data revenue growth and stable voice revenue. Service revenue in Ghana grew 19.0%* (Q4: 17.2%*) driven by strong growth in customers, voice bundles and data. Total revenue in Qatar declined in the quarter, reflecting significant ongoing price competition. In New Zealand, service revenue was down 0.7%* (Q4: -2.7%*) with growth in fixed line being offset by continued price pressure in mobile

Strategic progress

Project Spring

We continue to make great progress with Project Spring and are now 71% of the way through the mobile programme, having modernised 80,000 mobile sites, added a further 36,000 2G, 47,000 3G and 41,000 4G sites, and upgraded 71,000 sites to high capacity backhaul since the build began.

In fixed line we have extended our own next generation cable and fibre networks (‘NGN’) to a further 820,000 households in the quarter, bringing the total number of households passed in Europe to 26 million, or 62 million including wholesale arrangements.

As a result of our continued investment our customers are enjoying greater network coverage and quality. Our 4G outdoor population coverage in Europe is 75%, up from 52% a year ago, and we remain on track to reach over 90% by the end of this financial year. The dropped call rate in Europe has fallen to 0.58%, down from 0.90% when we announced Project Spring. In India, we added a further 1,000 2G and 1,100 3G sites in the quarter and remain on course for 95% 3G coverage in targeted urban areas by the end of the year.

Data and 4G

The demand for data continues to grow. Across the Group, the total amount of data traffic carried over our network has grown by 78% year-on-year (Q4: 81%), with AMAP growing 97% and Europe 64%.

We now have 24.1 million 4G customers across 18 markets and 4G now accounts for 35% of all data traffic in our European markets. We continue to bundle content packages with 4G to stimulate data usage and now have content packages available in 12 markets. In AMAP, the number of active data users across markets increased by 6.6 million in the quarter to 122.2 million.

Unified communications

We continue to strengthen our position as a leading unified communications provider. We now have 12.3 million fixed broadband customers across the Group, adding 264,000 customers during the quarter. In Europe, we have 11.5 million fixed broadband customers, adding 216,000 customers during the quarter. We now have 5.3 million NGN broadband customers across the Group, adding 0.2 million in the quarter. In addition to broadband, we now have 9.2 million TV customers across six markets in the Group and we expect to launch TV services in the UK later in the financial year.

Our organic fibre build programmes are progressing well. In Spain, we cover a total of 7.9 million households and in Portugal we cover 2.0 million. In Italy, our fibre-to-the-cabinet build had accelerated with over 3,500 cabinets installed in the quarter with the total now over 8,600.

Enterprise

Our Enterprise business has grown for the second consecutive quarter, with service revenue increasing 1.8%* in the quarter (Q4: 1.4%*) supported by improving trends in mobile and continued growth in fixed.

We continue to see strong growth across our cross-border enterprise businesses of Vodafone Global Enterprise, M2M and Cloud and Hosting, helped by significant new contract wins in the quarter. In M2M, we have increased the number of connections to 22.9 million compared to 17.5 million a year ago.

Summary and outlook

Trading in the first quarter was consistent with management’s expectations underlying the outlook statement for the 2016 financial year. The Group therefore confirms its outlook for the 2016 financial year.

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