Jul 22, 2016
Vittorio Colao
Thank you very much, operator, good morning everybody. Welcome to our Trading Statements for the First Quarter '16 - '17.
Today, I will take you through the highlights and update you on our commercial developments and then Nick will focus on financial performance in the 6 key markets and after that as usual we will have Q&A. So I will start with slide 4, the highlights for the quarter.
Overall, I am satisfied that we have made continuous progress consistent with our expectations for the business when we met last time in May. Group organic service revenue grew 2.2% to €12.3 billion.
This follows an underlying 1.8% growth in Q4. In Europe, we increased revenue at 0.3% similar to the prior quarter despite the leap year benefit in Q4 and regulated roaming price caps in Q1.
Adjusting for this, the underlying growth improved as our more-for-more propositions boosted ARPU with good performance in Germany, Spain and Italy offsetting ongoing challenges in the UK and Netherlands. Good growth in AMAP, 7.7% with excellent performance in South Africa, Turkey and Egypt.
Data volumes grew 63% supported by 4G adoptions with our 4G base more than doubling to 53 million customers. In fixed, we had another quarter of strong customer growth particularly on NGN users taking the total fixed broadband days to 13.7 million customers.
And in Enterprise, we delivered service revenue growth of 2.6% supported by continued progress in the strategic areas of VGE machine-to-machine and cloud and hosting. So let me go into the details with slide 5.
So this chart shows the underlying theme in our recent performance and improved customer experience translating into stronger, commercial KPIs and higher revenues. This specific chart shows the progress we are making in differentiating customer experience with Vodafone, aided by our much improved network performance due to Project Spring with EU for the coverage now at 89%, which is up 14 points year-on-year.
This is reflected in our consumer net promoter scores where we had widened the gap against the next best competitor. But most importantly, we have also established clear water between ourselves and the third player who typically compete on price.
Overall, we are now the NPS leader in 12 out of 21 markets, which represent around 370 million customers and those are half of our revenues. The momentum in our commercial KPI demonstrated in the middle charter where we added more contract customers and fixed broadband users than this time last year, and we’re also delighted to say that thanks to good earlier acceptance of our more-for-more propositions, contract as to in Europe increased quarter-on-quarter and has nearly stabilized year-on-year.
As a result, we deliver our 6 quarter of service revenue growth across the Group and the second in Europe. And although the headline level of 2.2 slightly lower this quarter, it is important to remember that Q4 included a leap year benefit while Q1 has the roaming relation, and Nick will talk about the exact numbers here.
So underlying momentum has been maintained and continues to be driven by three key engines of growth data, enterprise and fixed. Let’s have a look at each one of them.
So slide 6, slide 6 shows the data growth, 4G adoption is clearly a key data driver, key driver of data growth. In the quarter, we added nearly 3 million 4G customers in Europe and 3 million emerging markets taking the total to 53 million.
This is twice the level of a year ago. And although 4G take up continues to get up with only 30% of our European customer base is taking a 4G service, providing us with a substantial opportunity to continue to grow.
In emerging markets the story is about both 3G and 4G, and in total we now have 89 million users here, this is around 60% of total data usage. The average usage also continues to grow, it's now 1.3 gig across the Smartphone base in Europe and 0.8 gig in AMAP.
Smartphone penetration is still low but rising across our base creating again further opportunity to grow. Combination of customer growth and increasing usage has driven a 70 petabyte increase in data traffic in Q1.
This is the largest ever quarterly increase in overall traffic, and a 63% increase year-over-year. So we continue with the trends that we discussed in May.
Data story is good, but what about data monetization will ask some of you? The chart on the right shows the initiatives that we have put in place to deliver this.
The strategy is simple. We charge a little bit more and offer a lot more value whether it's more data, worry-free roaming, better services, extra options for the customers, so much more for more.
The German example, here is an interesting one, we had used new customer discounts by €5 in April, capitalizing on the premium position in the high end of the market together with other big operator. And there we provide super fast 4G on the Red brand.
In the low end which instead dominated by 3G, the MVNOs and second brands have been cutting prices, and here we have responded tactically online with offers that use the Otelo sub-brand. The solid early momentum we've seen our Red tariff schemes had this pricing change reinforces the point that these markets are distinct, and we believe that our two tier strategy is working.
Nick will also talk in his section about what has happened after the end of the quarter in pricing. So, this seems to be an area of our strategy that works.
Let's move to enterprise slide 7. This is very important, this accounts now for 28% of Group service revenue but already 32% in Europe.
Here we are a market leader with a clear competitive advantage, arising from our scale. We have leading NPS scores, a large internet of things network, and then IP-VPN network that now reaches 72 countries and 270 points of presence only for enterprise clear.
These assets have enabled us to deliver 2.6% revenue growth in Q1, and as you can see from the chart a lot of these come from fixed line, which is 28% of enterprise and growing at 5% clear out performance versus peer. In mobile, our growth is more modest, it's 2% despite healthy customer growth with 36 consecutive months of positive and of course here we see price pressure across many markets, but still we are growing 2%.
So, last part of the chart, strategic areas of growth. Here, I would say nothing new to communicate.
We continue to success. We have success with VGE, with internet of things and with cloud and hosting growing respectively 6, 20 and almost 14.4, 15 point respectively.
Today, we have 41 million IoT connections, internet of things, connection which is to my knowledge one of the largest basis in the world. So, for enterprise after data, I would say continues to grow in the right direction.
And finally, slide eight, fix and convergence. Our fixed business represents 21% Group revenue and service revenue increased 1.9% in the quarter.
The NGN coverage is now 74 million homes including wholesale lines. This represents 48% of the households in Europe, which is comparable to all-of-the incumbents NGN footprint.
We reach 30 million homes with our own infrastructure, which is up 4 million on last year, as we have built in Spain, Italy and Portugal. And as we indicated in May, we will continue our self-build program and augment this with deals like Ziggo One in the Netherlands and Enel in Italy, which I will come back to on the next slide.
If you go to the middle part of the chart, it shows our strong continue momentum NGN in Europe. This quarter, we added 362,000 NGN customers and the majority clearly our high margin on-net, which is important for us.
As a result, the total NGN base increased of 6.8 million half of all of our broadband users. We are also progressive rapidly on TV with our base growing nearly 100,000 in the quarter to 9.6 million while our high value fully converged customer base rose by 200,000 to 3.7 million.
So good momentum, quite frankly there is a lot more growth opportunity ahead of us especially on the 30 million on-net home, as you can see on the right part of the chart, 5.8 million on-net NGN customers equals, what I would call, a good, but still low around 20% penetration in Europe. And therefore here again, we have an opportunity to significantly grow over the next few years.
There is clear value story here because with on-net NGN, we avoid the wholesale fee and we can charge a higher ARPU. Including TV and fixed voice customers, the revenue generating units per unique subscriber for our on-net footprint in our largest market is now 1.9 times, compared that to an industry leading level of around 2.5.
So, also on the RGU front we have an opportunity. So I said, I would say few -- turning to slide 9.
I said, we would always say we take a market-by-market approach given the substantial differences between the countries and our agreement in June to merge with Sky New Zealand is here another good example of why this makes sense. Strategically, we prefer to remain distributers of content and focus on network assets.
But New Zealand incumbent has been structurally separated, so NGN access is not an issue. Sky in New Zealand owns valuable content rights in this unique situation.
A merger would allow us to create the leading integrated operator in the market, capturing attracted cross-selling and cost synergies as well as owing 51% of the new entity. We will also receive NZD$1.25 billion in cash upon closing, which is expected to take place by year-end.
In the Netherlands, again another country-by-country approach. Our joint venture with Ziggo is progressing well.
As part of our integration planning, we recently announced that our current CEO in the UK, Jeroen Hoencamp, and the existing Ziggo CFO, Ritchy Drost, have been appointed to lead the joint venture, once we get all the approvals as a part of the Phase 1 review process. As you know, we have offered remedies to address the competition concerns raise by EEC and other parties today we cannot provide more details.
And finally, another country-by-country approach. Wholesale agreements, Enel, the deal is signed in Italy.
The first 500 homes have been passed in Perugia and the speeds here are up to 1 gigabit per second. In Germany, another different situation, we have secured improved conditions in vectoring although more needs to be done to mitigate the incumbent remobilization risk.
And next year, we will hear from Ofcom on its proposal for Openreach. Here, we see a need to reform to create a truly independent and user Openreach, and at the very least we expect complete access to passive infrastructure that’s imposed much better plans for wholesale access and much higher quality in service provisioning and repairs.
Turning to slide 10, our customer experience program, this program has become our core marketing strategy for branded service differentiation, building on the leading net of quality created by Project Spring. Connectivity is for us the main route to differentiation with the goal also to ensure that all the other aspects of the customer experience with Vodafone are outstanding, and to ensure this is achieved throughout the Company.
We have confirmed this year that customers experience metrics will constitute 40% of the annual bonus award for all of us, and again this is the second year where we will do this, we already did this last year. Strategy which really we take the place of spring in all the conversations we have with internally and with investors is summarized by the acronym CARE.
The foundation of the strategy is excellent commitment to see of CARE, 91% of our data sessions as to date is 3 megabit per second or higher enough to provide high definition video, enabling us to give net of guarantees to our customers which you have seen in many of our advertising, our 4G roaming footprint, now in over 100 marketing, another clear area of the differentiation of the sea area. Second, we want our customers to be Always in control, the A of CARE to help to manage communication costs.
Here a key KPI is a penetration or the My Vodafone app for real-time monitoring of usage and spent. This reached 35% and we are aiming to take this for 60% in two year, but the app is also our digital window to promote the best offers directly to the customers, the example is roaming where half of our European customers now use our worry-free roaming offers.
Third, we aim to Reward loyalty, the R of CARE through individual offers and to recognize tenure and coverage usage and ultimately lower churn. Early progress has been made with EU customer contract churn improving 1 percentage points since last quarter.
And lastly, Easy access to customer service is the E of CARE. This is large services, app services but also through a 24x7 live chat platform while the average first quarter resolution rate across the Company still is too low to be called world class in some of our best businesses and of course we are now over 80% for that metric.
So, we will cover more the CARE strategy area at our H1 results in November. I would, before passing to Nick, it's a good quarter of Vodafone strategy at work and now Nick let’s dive into to that.
Nick Read
Thank you, Vittorio, and good morning everybody. If we turn to slide 12, and as service revenue growth by market, as you can see by the green bars, we are now growing in most markets reflecting our strong operational and commercial execution despite the regulatory drags from roaming in the quarter.
Three markets had negative growth in the quarter, the UK which I’ll come to later, Netherlands where we continue to see increased price competition and Greece where we transfer carrier revenue to Group, so underlying year-over-year performance was flat. Turning to Germany on page 13, under the Spring program across the Group, our goal was to achieve network co-leadership and open up a performance gap versus the second tier players.
The chart on the left shows our NPS lead at seven points versus the third player whilst at the same time materially closing the network gap to the incumbent. In terms of the mobile network, we've been leading voice quality in the market and strong 4G coverage of 89%, an 11 point increase year-over-year.
We are marketing the quality of our network through our gigabit campaign, and we will be looking to make further 4G enhancements by utilizing the additional 1,800 megahertz spectrum acquired in last year's auction. And in fix, we recently launched the premium 400 megabits per second cable offer.
The middle chart covers our commercial performance. Mobile contract net ads were a modest 8,000 in the quarter due to our actions on channel mix with lower indirect commissions at the time when the incumbent seems to be actively increasing commissions.
As a result, we reluctantly had to follow the incumbent and raise commissions in June. Clearly we remained focused on balancing the channels and hopefully we will see competitors follow suit.
As Vittorio mentioned, we refreshed their tariffs in April adding more-for-more; and consistent with this in July, we rebalanced the commercial structure lowering the monthly service fees by €5 per month whilst increasing the monthly handset fee by €5 per month, leaving the overall economics unchanged for a handset and service customer, but importantly enhancing a value perception for our own service including SIM-only propositions. It's been positive to see that both DT and our-selves have reduced upfront handset subsidies in the month as well.
On the fix side, it was another strong quarter where we achieved net broadband additions of 108,000 including 92,000 in cable and the remainder in the DSL business. The chart on the right shows service revenue trends with KDG now included in all quarters with Q1 growing at 1.6%.
The performance was flat quarter-over-quarter despite absorbing the negative impact of roaming revenues given the continued underlying progress in consumer mobile and fixed. And end surprise service revenues fell 1.3% due to ARPU weakness, but we're seeing early signs of competitive pressure easing.
Turning to Italy on page 14, the chart on the left showed that our NPS lead over the third player is significant and we've established overall network leadership in the market and demonstrated by our 4G footprint coverage at 96%. Again, we're reinforcing our leadership through our network guarantee, which offers compensation for customers that are not completely satisfied with our 4G experience.
This network leadership allows us to maintain a price premium in the marketplace along with the incumbent versus the tier two value players. However, the market has witnessed an increase in promotional pricing with free being particularly aggressive.
As you can see in the middle chart, our positive net ads in mobile consumer contract have now offset the losses in prepaid. In enterprise, the customer base declined and maybe intense price competition in the SOHO segment.
In the fix business, we increased the broadband customer base by 46,000 mainly driven by new fiber customers taking us to over 2 million. The chart on the right shows how our strong network and commercial execution has translated into a growth of 1.2%.
We benefited in the quarter from our move to a 28-day billing period for prepaid customers. In the fixed business, we return to revenue growth due to the higher customer base, but increasing aggressive price moves from competitors are likely to act as a continued drag throughout the year.
Turning to the UK on slide 15, as you will be aware, our customer service in the UK is being impacted by operational challenges following an IT billing system migration. The chart on the left shows that we are beginning to return to normal customer service core volumes, although more work is required to improve the performance of our IT systems.
In addition, we’ve made significant progress on network enhancements at 4G coverage now stands at 95%, up from 76% last year. Based on this improvement, we’ve launched our 30-day money back guarantee for new customers.
As can be seen in the middle chart, contract net additions improved to 26,000. Consumer contract churn improved significantly quarter-over-quarter to 15.5%.
We continue to achieve strong growth in 4G, adding half a million new customers, taking the base to 7.5 million. As our service stabilizes, we were able to accelerate our broadband service, adding 28,000 new customers in the period.
Field trials for the TV service are underway. The chart on the right shows the 3.2% decline in service revenue in the period.
This compares to an underlying decline of 0.8% in Q4. Mobile revenue declined 3.6 driven by several factors firstly the IT challenges, secondly out of bundle, and as we flagged previously, and finally the regulatory impact of roaming and the small MTR cuts.
Fixed revenue, which is mostly enterprise related decline 1.8%, compared to a growth of 5.5% in the prior period. This slowdown was due to tough comps in prior periods, including the strong carrier revenue contribution in Q4 and the lacking of a large contract win in Q1 last year.
As stated in May, we expect to see an improve top-line performance in H2. Rounding off the major European countries, Spain on page 16, starting with the chart on the left, Spain is a little unique with three strong converged players.
So the key is to ensure we have network co-leadership, which has been achieved with a 4 point NPS lead over the next best competitor. This reflects our lead in 4G coverage of 92% and an extensive fiber footprint reaching 8.9 million households.
Building on this into differentiate further on service, we recently launched worry-free tariffs with integrated roaming, which are already used by 60% of roamers. As the middle chart shows, the more-for-more tariff changes announced in April had a negative impact on churn in April-May lead into a slowdown in mobile and fixed customer growth.
I’m pleased to say that mobile churn returned to more normal levels in June, but remains elevated in fixed due to aggressive competition in the low-ends. We now have 3 million fixed broadband customers with 1.9 million Vodafone One converged customers and 1.1 million TV uses with the latter supported by the launch of our new DSL TV proposition.
The chart on the right shows the service revenue trends, which now includes Ono in all quarters. The reported figure is in red, which is now positive for the first time in eight years.
Excluding handset financing shown in black underlying growth was very strong at 4.9%. This was driven by two factors, firstly the more-for-more value enhancement for both new and existing customers that Vittorio mentioned; and second growth in the fixed and mobile customer base over the year.
When considering Q2, you should not that last year was very strong due to the launch of an out of bundle proposition which we think cuts from Q3 onwards as part of our CXX program. Moving to Vodacom on Slide 17, which reported its results yesterday, here you can see that our NPS lead over the next best competitor is 16 points and is the highest of their large markets.
We've maintained a clear network leadership overall with 14 network coverage at 65% and 3G at 99%. Building on this differentiation, we remain focused on successful Just for You targeted personalized offers launch last year to drive further growth.
We continue to drive good KPI performance on the back of our network leadership and focus on customer service. Customer growth remains strong, with contract churn now at record low of 5.3%.
As the middle chart shows, data usage is rising rapidly with the number of bundles up over 50% year-over-year and the 4G customer base up a 0.5 million in the quarter to 3.6 million. The chart on the right shows the service revenue trend for Vodacom with South Africa in the red bars and the international business in black.
Growth in South Africa was 5.7% in the quarter, stable quarter-over-quarter after taking into account the leap year effect in Q4. Trends remain strong driven by good customer growth, stabilized voice revenue and strong data reduction though clearly the economy remains fragile.
Vodacom's international operations outside South Africa account for around a quarter service revenue. Here a growth of 4.4% was significantly below the previous quarter due to a new customer registration process in Tanzania, DRC and Mozambique.
This impacted the customer base in Q4 and Q1 and reduced service growth by around eight percentage points in Q1. Over the next few quarters we expect the rate of additions and headline growth to normalize.
Finally, India on page 18, as the chart in the left shows we have achieved overall co-leadership and clearly there is a material gap to the value players. As 3G coverage is targeting urban areas, it is now 96%.
And our 4G service is on track to reach over 60% of data revenue in nine circles by the end of the fiscal year with our existing spectrum. As you're all aware, a new spectrum auction is expected to take place in September-October.
This is an opportunity to further enhance our network but as previously indicated we will continue to adopt a disciplined circle-by-circle approach. To enhance the customer experience and get comfort when using data for the first time we launched a no question asked waiver for those customers who experience first time bill shock.
Moving onto the commercial KPIs, the chart in the middle shows how data customers are rapidly migrating to 3G/4G though our 2G customer base felt 16% year-on-year and 3G/4G users increased by 46% to 32 million with data usage per 3G/4G customer three to four times that of 2G. Turning to service revenue as showing on the chart on the right and the bars in red and reported growth increased to 6.4%.
The green bars exclude the impact of various negative regulatory impacts, and on this basis underlying service revenue grew by 7.7%. The vast majority of the two percentage point quarter-over-quarter slowdown was due to the reversal of the leap year benefit in Q4 and a lower interest circle roaming revenue as Airtel, Idea and Aircel rollout additional 3G circles with their own spectrum.
Data revenue growth slowed to 22% as a result of continued data pricing pressure and moderating active data customer growth. And in light of recent market development, we announced an increase in data bundle allowances per day in line with the market which may way in the near-term but should see strong elasticity overtime.
Voice revenues recovered slightly as competitive pressures on processes but average usage continues to fall. So, to summarize on page 19, we continue to make good progress.
As Vittorio covered, we are focused on building differentiations through four pillars of our customer experience excellence strategy. That focus is maintained in top line momentum just by absorbing the roaming regulation impact in the quarter.
With positive performances in Germany, Italy, Spain and South Africa, as well as Turkey and Egypt coupled with the steady improvement in India whilst we work hard to improve our performance in the UK, and more-for-more propositions that helped to drive ARPU improvement in the quarter and we maintained a strong momentum in fixed line with a focus on highly profitable growth in our under penetrated on net footprint of 30 million homes. Looking forward, we expect to make continued underlying progress in the remainder of the year.
In May, we said that we expected H1 to have a flattish reported revenue trends on the 1.8% underlying Q4 exit points while we have slightly outperformed that post this quarter, we faced a further roaming impact in Q2 along with tougher year-over-year comps particularly in Spain where we had a large non-recurring outer bundle data revenue spike last year and South Africa which benefitted from the launch of our successful just for you propositions. Beyond Q2, we continue to expect to make steady progress on our underlying top line growth in second half of the year.
And as we begin to lap the higher OpEx base created by projects spring and our fit-for-growth initiatives accelerate, we expect this improved growth to translate into higher EBITDA growth. So for EBITDA, we expect a higher waiting of growth in H2 versus H1.
As a result, I am pleased to reconfirm our full year guidance of 3 to 6% organic EBITDA growth and greater than €4 billion of adjusted free cash flow. So on that Vittorio and I will be happy to take questions.
Operator
Thank you ladies and gentlemen. [Operator Instructions] Our first question is from the line of Polo Tang at UBS.
Please go ahead, your line is open.
Polo Tang
I just have one question, bigger picture one on cyclicality. If you look at your business today, how cyclical do you think your business is?
Thanks.
Vittorio Colao
Hi, Polo it's a usual question that is asked when people don't know what the environment is. For sure we have certain dependency for the third of the business which is enterprise on the general state of the economy.
Therefore, I would say for that third we clearly depend a lot on the state of things around us. On the consumer front there are several different forces at work.
There is the kind of big evolution of our data and data expansion which is not that cyclical, but of course in negative cycles, price pressure and competition and to over compensate with price reductions the natural increase of our business. So it's hard to give a mathematical answer to your question I think we are well protected by the kind of secular trends to our digitization in consumer.
We are more exposed to the enterprise fluctuations. We have put in place recently again a number of measures, we're going to track on a fortnightly basis a number of key operational indicators to detect early signs if there is a slowdown in the economy for the time being it's too early to give you an answer.
Nick Read
Just -- Polo, I would just do one build, which is referring you back to the May presentation, the chart shows around the resilience the fact that the composition of the Group over the last three, four years has really shifted. Obviously, you've now got a consumer contract in bundle, fixed a measure part of that business 40%.
So I would say, though obviously as Vittorio said, we've going to face some cyclical aspects of the size more resilient profile.
Operator
We're now over to the line of Akhil Dattani at JP Morgan. Please go ahead.
Akhil Dattani
Hi, morning. A couple of questions, please, from me.
Firstly, just on Germany. Nick, you mentioned the various changes you've seen in a competitive environment through the quarter.
And I guess, specifically, we've seen quite a bit of competition, the low end of the market and no-frill segment. You mentioned Deutsche Telecom's move within the indirect channels.
Just more broadly, how are you feeling about the way those competitive dynamics are shifting, at the moment, in the context of the weaker adds you've seen? Is that something that you're worried about or not?
Or do you feel very happy remaining quite disciplined? So just a broad question around competition in Germany; second thing is on more-for-more price changes.
In Spain you've had a pretty unique situation where you've put the changes through on the entire back book. So we've seen a pretty dramatic change in the way that's impacted your growth performance.
But I wonder if you could help us understand, firstly, how you think about the read-across to how these changes could impact your other market? But also, how you're seeing customer perception change?
It's quite interesting to see in your KPIs that both your data traffic and you voice traffic trends in Spain have accelerated a lot this quarter. So does it give you a lot more confidence, sustainability of these sorts of trends?
And then just a very last thing was just on Italy. You've mentioned, we've had obviously the remedy process formalized, or at least we've got some idea of what the remedy is likely to be.
Just any comments around that would be very interesting. Thanks.
Vittorio Colao
So why don't you take Germany, and Spain and Italy I do?
Nick Read
Somehow, Akhil, you’ve managed to do a question that asks about every country in Europe. So if I just take Germany, if I was just going to summarize the overall competitive landscape, I’d say a couple of points.
First of all, it’s very much a two-tier market place. So you got ourselves and DT, high-quality 4G market.
And what you’re seeing there is more from more pricing moves going through. So I would say a healthy dynamic.
I would say then you’ll seeing the second tier, which is more 3G market place with value players and a degree of competition. As Vittorio said, we are deploying Otelo as second brands to remain competitive in the area.
I’d say the second dynamic you see, is look at Germany is a little bit unusual, the three levers, if you like, commercially. One is commissions, one is subsidy upfront and one is coal pricing.
So coal pricing, I would say more-for-more increasing. I’d say subsidy upfront in July is coming down.
So the upfront charge is going up in the market place. And then the third area is commissions into indirect of which we have try several times to bring that down DT seems to be quite actively promoting into that channel.
We would hope that would moderate overtime.
Vittorio Colao
Yes. Then, Akhil, couple of comments on Spain in Italy, first of all Spain is, you cannot really do read across easily.
Don’t forget that Spain is a market where there has been massive price reduction. So now this ARPU increase in the country, there is not price increase in the context of much more-from-more, is helping recover some of that.
We had a little bit of slowdown in acquisitions quite frankly, it’s also a quarter where, typically, you have students stuff and other more seasonal effects that would make the quarter in any case slower. We think the situation is now stabilizing.
We got a little bit hit in NPS at the beginning, but now it’s coming back again, we are again leader, as Nick said before. So I think it’s rather stable situation, but I cannot extrapolate that we’re going to do the same everywhere else to be clear.
On Italy, I would say we are waiting to say what happens. Italy, we had a good performance in the market, which is becoming again very promotional and I have to say not necessarily, because the number three and number four only are promoting, also the number one is or the core number one is sometimes going down the path of excessive promotions.
We will be competitive, let me say, we will continue to be competitive and the arrival of a new operator in Italy at the end of the day, I mean we’ve been the second entrant in a market where there will be a six one. One went out at some point.
It’s very, very promotional it’s a very liquid market. Now in Italy these days you can get 4G for EUR7 or you can get 30 for 30.
So yes, there will be an impact from the newcomer, but quite frankly I think the benefits of the consolidation will be bigger, if I’m honest. So but you cannot completely read across, because Spain is a very highly converged, highly bundled, completely non-subsidized market.
Italy is a prepared less bundled and again different type of distribution. So read across are difficult, but still the strategy is the same, much more-for-more, trying to avoid price decreases, eventually, add more to the packages and to the offers, and create hopefully more loyalty also through this.
Operator
We now have Nick Delfas at Redburn. Please go ahead.
Your line is open.
Nick Delfas
Two questions, first of all, on churn in Europe. We’re still in the mid to high teens.
I’m just interested in how you think about where that can go over a three-year period. Obviously, small number of postpaid customers in South Africa at 6% and, no doubt, there are a huge number of different churn rates within your 16%-17%.
But where do you think overall contract churn could go? Secondly, on Enel in Italy, I just wanted bit more detail.
Who is doing the in-building wiring if you’re in an MDU? And what kind of hard commitments are you making to move customers over in the areas that are passed by Enel?
Vittorio Colao
I can take it. On churn, Nick, it’d be more precise, but let me tell you.
There are two positive things, I would say two plus positive things affecting churn in the way forward. First of all, conversions, clearly, the more you bundle in a family, the more you have an impact on churn, whether the impact has some.
My competitors say 56 points or two or three. I don’t know.
But it should be definitely few percentage points. Secondly is the handset, the separation, either hard or soft separation of handsets from the service, which clearly takes away a strong reason for shopping around and churning.
And I’m glad to see that more-and-more Vodafone is applying this in different markets with success. And this of course again has to be based on a strong network.
So where we have strong network performance and where we have strong differentiation on network, we can more easily separate the two. And third, much more-for-more intrinsically in conjunction with the previous two, makes customers go for larger packages.
Again, I go around shops in every market where I am and it’s incredible how year-after-year the normal package has gone from one to two to four. And now people start saying that the normal average allowance should be seven.
The more they invest in the as opposed to in hardware, the lower the churn could be. So, I think Nick can give you more precise answer of churn ambition, but I would say few points.
Nick Read
Yes. I mean, just to build on, I think what Vittorio did is explain all the good levers you pull to drive down churn as opposed to the old model, which was just drive more subsidy into drive, if you like, lock customers in, so that we’re not doing that execution.
So it takes a little bit longer to bring churn down, but you have to sort of say to yourself we have a number of markets that are operating in the 10% to 12% level. And therefore, I can’t see why that wouldn’t be an ambition over time.
Vittorio Colao
On Italy, the answer to your question is, it’s Enel and their contractors doing it and we have a price already agreed. And in terms of hard commitment, we do have the commitment but most importantly, we do have the interest to move our customers to them, because there is a financial benefit for us to be with Enel rather than being on the Telecom Italia network.
And of course, there is also a strategic interest in putting less money in the pockets of your competitor. So there is a commitment, but there is most importantly, a strategic and financial motive behind.
Nick Delfas
So how big is the hard commitment?
Vittorio Colao
Sorry…
Nick Delfas
How big is the hard commitment?
Vittorio Colao
No, it’s a commitment to do it whenever we can, whenever we can, whenever the conditions allow.
Nick Delfas
Okay thank you, much.
Vittorio Colao
But again, this is a partnership. So it's in our interest to do it.
The problem is not the commitment, the opportunity here is most important.
Nick Delfas
Okay, thanks very much.
Operator
We’ll now go to the line of Robert Grindle at Deutsche Bank. Please go ahead.
Robert Grindle
Just a clarification on Nick's Vodacom international revenue trend normalization comment. Is it that the growth normalizes back up to the pre 8 percentage point hit from the registrations?
Or are we looking at a new normal, because the new world of registrations is different than it was before? And then just secondly, data traffic seems to have been restated in a number of your countries.
I wonder what's story there. And because I can't resist any pokey effect on data volumes seen so far in Q2?
Nick Read
So I will do the first and the third. So you are saying pokey, as in go.
What sort of impacts you are seeing?
Robert Grindle
Yes.
Nick Read
We’ve got a little bit of data on that. A typical German user I think is using about 10 megs -- it's not particularly data heavy.
About 70% of the usage is actually on the mobile network, so I would say -- it's interesting, but I don’t think its transformation on their numbers. In terms the International side, it’s a little bit hard to predict because whenever you do these customer registration processes, clearly you are disconnecting SIMs and you are disconnecting SIMs, some of which have clearly revenue on it.
What you are expecting is that those customers actually then go through a registration process and resurface back. But you have that lag effect because it’s a new process and it’s a bit heavy.
So, would we be looking to, over next two-three quarters return to something similar, I would say, yes, but it does somewhat depend on what happens to those customers.
Vittorio Colao
On the data volume growth, Robert, I suggest you liaise with our IR department, because there’re technical factors there but not something that we can handle here -- not quite frankly of concern, technical as I said.
Operator
Our next question is from the line Andrew Lee at Goldman Sachs. Please go ahead, your line is now open.
Andrew Lee
Just firstly, as you pointed out, Vittorio, we are seeing increased regulatory commentary across Europe on NGN fixed access. I was wondering if you could give a bit more color on your thoughts on how this appears to be changing across Europe.
And, whether it makes you more confident to pursue a wholesale-led path where you don't have your own network? And then just secondly, I think just following up on Akhil's question earlier.
As you pointed out, you had strong performance in Germany and Spain on the more-for-more strategy. But you did see weaker net adds in Spanish fixed, which I don't think reversed in June; and also, weaker German postpaid mobile.
Do you think these are one-off hits in the quarter with more-for-more activity? Or is there a longer-term concern you have from sub-brands or MVNO pressure where you exert that strategy?
Thank you.
Vittorio Colao
Thank you for your question, very good both of them. The first one is very strategic.
I think and I think it's also evident in the vectoring decision on Germany and on the Ofcom positions here in the UK, even if they are not fully shaped. It’s clear that our position, the Vodafone’s position, which I said, it’s important that Europe modernizes.
But this should not come at the expanse of good competition, actually has really got traction in Brussels and in the European regulators, across the European regulators of BEREC. So, the position which is coming out as the prevailing position seems to be to encourage, build, to encourage modernization, sometimes even modernization of copper, which we think is not a great thing.
But pragmatically we can accept, provided that this doesn't come with restriction of competitions. Therefore, the two elements, which are very important that Vodafone has been campaigning for, I think, I put more time on this in the last year and half, than on many other things, on any other thing.
The position of, there should be a good wholesale access price and condition, but also access to DAX, poles and dark fiber, if possible, to give choice between a make and the buy option. And this seems to be shaped in different ways, more or less everywhere.
Now this is good. And to be honest, I think it’s good for the industry.
I think it should be seen by you and by investors, as a positive for the industry, because it means that at the end of the day modernization will take place vectoring, whatever G, fastest things will happen, but this will not help substantially only one player, we’ll help everybody go at better speeds, go at better service, potentially higher RPUs, which we think is the objective of everybody, but not heating competition. So, we’ve been, really the proponent of disposition.
We’ve put a lot of efforts here. Somewhere we gain.
Somewhere we’re neutral. But at the end of the day, it’s a good.
And our performance in fixed line, in Europe, and our presence in all markets, at this point, including smaller ones, like Ireland or Greece and so on, is, I think, a proof that we are really doing the right thing. On your second question on mobility, I think you are correctly pointing at two things, which however are very different.
In Spain, our fixed line performance, as I said, has been hit by seasonal effects and also by the higher prices. We’ve got a little bit of a movement of customer, negative reaction.
But, quite frankly, we think we are reacting in the right way. One point remains open for us in Spain, and I want to be transparent on this.
We see erosion coming from the Jazztel competition. So while us, Telefonica Orange, we’ve a very consistent, I would say converged strategy, Jazztel plays a little bit different game.
Bnd therefore, one decision that we have at some point to make is whether at some point in Spain, we’ll activate our second brand and start hitting in that part of the market as well. So Jazztel is a little bit of a free-rider.
And again, at some point, we might decide to give them a little bit of a harder time if they continue with the current pricing. In Germany, the issue is on postpaid is an issue, or has been an issue of subsidy in indirect.
Deutsche Telecom has done a move, on one hand, I would say with healthy pricing on the customer side but then putting a lot of money in indirect channels. As you know, we have invested and we are convinced, we need to shift more on direct and our own control distribution.
And that has got a little bit of a cost for us. Again, we believe in long-term, we believe in healthy pricing and we will try to recover a good commercial performance without damaging the overall profitability.
Nick, you want to say a bit more about Germany?
Nick Read
I was just going to say, exactly, it’s not related to the more-for-more proposition at all. It’s the indirect performance.
And the other point I will just add is that we did the Deutsche Bank deal last, just on [Multiple Speakers], so that’s like 33,000 net adds this time last year on Deutsche Bank.
Operator
We’re now over to David Wright of Bank of America. Please go ahead, your line is open.
David Wright
A couple from me, please, both responding I guess, to competitive dynamics. First, in India, we've seen a lot of the operators lowering their data prices, perhaps in anticipation of the Jio launch, whenever that might be.
Let's make a best guess of sometime in the second half. If you could just talk about how you're positioning yourself for that in a little more detail, please.
And then, secondly, in Spain. Telefonica, looking to slightly reshape its content offering, moving football and into the basic conversion packages with a price increase, also, how you're thinking about that versus the previous pricing structure?
Thank you.
Nick Read
So, on India, we announced the new pricing today. So, we are following the market.
Just to be clear on what following the market means. So, data allowances have been increased in both 2G and 3G, I call it sachet value processing, so the small increments.
So this is up to 300 megabytes usage one to seven days. So, we’ve increased the allowances between 25% and 40% that held the price points.
Actually, if you do the analysis on the effective rate within that, really what we’re doing is we’re moving that rate closer to the entry level of the bigger bundle, so the 1 gig price points on an effective megabit pricing. We’ve also increased allowances impacts greater than 350 rupees by about 25% to 40%, as well whist holding price points.
So I think it’s more about stimulation of the market, ahead of Jio coming in and making sure that we offer good value to the higher value customers as well.
Vittorio Colao
And if I may add again a more general comment, I think what Nick described is what, if I may, tend to always do when new entrants come in the market. Again, my comments on Italy, but I could comment about any magazine.
By now we have seen many new entrants in many places. And if you look at the classic print in strategies that we did since my days in Italy, it's always and the months before, you increase what you give to your customers.
You just neutralize the appeal of a new maxi offer from a new competitor with something which is not probably maxi but it's more generous. So, technically it's not reducing price.
I mean, the mathematical effect is that you reduce the price. But in reality what you are giving is you're giving more to reduce the appeal of the offer of the new entrant.
And which by the way is what we've been doing in most markets. So, correct answer I would say.
Well, on Spain, on Spain, two comments here, first encouraging to see that there is rationality in the market. As you know we all have access to content.
We will do what we think is right in the context of the Spanish market. And second, as you know, I always said that Vodafone wants to distribute content that we think that bidding for exclusivity only pushes up prices.
And then, as a result, you need to try to recover them in a way or another from customers. So, I think that exactly what we said that would happen is happening.
But as far as the three main operators and leaving for a second just are out of the picture, I think there is some pricing rationality in the market.
Operator
We are now over to line of James Ratzer at New Street Research. Please go ahead.
James Ratzer
I have two questions, please, on different markets. The first one is just on the UK, please.
You've mentioned one of the drags you're facing there are out of bundle revenues. I was wondering if you could talk a little bit more about how much further that drag has to run.
Do you think you’re out of bundle revenue exposure is higher than some of the other operators. And you also mentioned, Nick, in the commentary interest in duct and pole access.
I was wondering if you could talk a little bit about how serious you are about considering rolling that out. Would that be something you would do potentially on a wider scale or very selectively?
And then the second market I had a question on Spain. One operator that hasn't been talked about much is MASMOVIL who seem to have some fairly grand ambitions in that market from a small start and also have some quite competitive price points on just very basic fixed mobile offers.
I was just wondering if you could say if you're seeing any impact from them at all in the market at the moment and what you think about them going forward. Many thanks.
Nick Read
Maybe if I'd just take the first part, which is the UK out-of-bundle, and Vittorio just does the regulatory side, and so just from out-of-bundle bit, there is really two dynamics taking place in the UK. So, one was the 0800 regulation, that was a drag.
So when we get to Q2, we start to annualize on that 0800 drag. The second aspect was around about from memory it was about September we put in a new CSX process to ensure that people were notified about going over the bundle sizes, et cetera, in terms of data.
So, through those mechanisms, which we pretty much did most of the countries they’re active immediate drag on data out-of-bundle revenue growth. So, what you're going to see, that's one of the key drivers for the group actually in the second half, which is we start to annualize on that data out-of-bundle drag through the CSX program that we put in place.
Vittorio Colao
Now that Nick has given the financial answer, it gets to the ducts and poles. The net of implementations specialist comes in.
On ducts and poles, the answer is, it's necessary to have both access to ducts and poles and access to active products, because, of course, we want to do exactly and we need to do exactly what you describe. On one hand, we need to be flexible, we need to be selective.
If I want to connect a certain area where we have many enterprise customers or base stations or technology facilities, maybe selectively in certain areas, we want to be capable of rolling out our own infrastructure for which access to ducts and poles is there important. In more less-dense areas, in places where we do not have the economics there is no point from a return on capital perspective to duplicate the infrastructure and we need to have the possibility to acquire from BT at decent price.
So this is the key point that I’ve been campaigning for, for a year and half. Good competitive conditions need to allow both.
And when you have both, you create the right competitive dynamics and also an incentive, to be honest, to Openreach, or to Deutsche, or whoever to be honest and give good service when they -- where there are in resell, because they know that we have an alternative. So I’m glad to see that this point is landing in Europe.
And the answer to your question will depend, as always, on specific markets, on specific geographies. On MASMOVIL in Spain, listen, as I said, this is great intention, they don’t have cash flow.
I mean Yoigo doesn’t have positive cash flow, zero cash flow. They need to deploy more fiber.
They need to use more of their network. What can I say?
We will have another competitor. It’s going to be not probably the main concern that we have in Spain.
But of course, we take everybody seriously and we’ll see what they can achieve, starting from where they start. But it’s hard to comment more than that.
James Ratzer
Great, thanks very much.
Vittorio Colao
And by the way, Yoigo has got very aggressive price point for the last year and half. I remember the €20, €19 20-gig thing, which, at the end of the day, have not moved the market too much.
So, again, much more-for-more is also a strategy that, including football including content, is also a strategy that creates clearly different tiers in the market.
Operator
We now go over to Justin Funnell at Credit Suisse. Please go ahead, your line is open.
Justin Funnell
Three questions, just quickly. It looks like your data volume growth has started to reaccelerate, when you look at total gigabytes growth year-on-year in Europe.
I think we’ve been slowing down for 1.5 years. Is that simply the effect of more-for-more, people just simply getting bigger bundles?
Or is actually there a new wave of underlying usage coming through from new applications? Obviously, not Pokemon Go, but maybe something else going on out there.
Secondly your NPS score is obviously a key focus of your business. Generally, we’re looking at number three operators starting to build up more 4G over time.
Do you think you can continue to extend those NPS scores over the number three, or really the main effort is to try and sustain the leadership you now have? And then thirdly o.tel.o.
in Germany, quite a big change in your prices for o.tel.o. What can you do to stop that infecting your premium-brand pricing?
There’s a pretty big gap between the two now. Thank you.
Nick Read
Shall I take the first two?
Vittorio Colao
And you take Germany? So on data volume growth, Justin, as always, its little bit likely impact of the economic type of equations, there’s many forces at work here.
I think the growth of video continues and is very important factor in data. I think the penetration of smartphones is also very important because we, as I said in my opening remarks, we still are at a relatively low penetration of smartphones, or at least not a complete penetration of smartphones.
So, the two together are pushing data. We are also, as I said, taking as a central point for what we recommend to customers more-for-more the four and the seven rather than the two and the four.
So, it’s a combination of our much more-for-more supply driven, if you want, strategy with a demand driven offering of video and video applications there. On Pokemon Go, if you're interested, unfortunately the average utilization of data of one hour of you chasing the monsters, so whatever you call them, is only 20 megabyte per hour.
So, why it is a great thing to talk about and to do from a usage perspective Pokemon Go will not change the future of Vodafone but we are all very amused by this thing. It's not -- it's more the Facebook feeds, it's more the Twitter real time, it's more the Periscope, it's more these type of applications.
And of course the serious content, the BBC and everything else. It's more the video side rather than the gaming one that is important.
On NPS, you asked a very intelligent question. I think it's still possible to improve our NPS lead but it has to be exactly what I talked about, not pure the C, the connected -- not purely the C, the connectivity element of CARE.
But it's a lot on the R and the EBITDA, i.e. the rewards and the ease of use.
Our intention is a progressive, more aggressive use of our My Vodafone App to really manage customers and deliver offers but also deliver service. So, the complexity of doing it is very high, and that is something that requires time, investment.
And it's not really money, it's really operational capability, it takes a lot of time but once you have it it's really hard to replicate. So, yes, we continue on the connectivity side but we're extending more in the full CARE dimensions, the four pillars of CARE.
o.tel.o pricing, the €5…
Nick Read
Justin, I'd say, actually, I really like what we're doing in Germany from a commercial strategy. And you don't just look at pricing isolation you look at channel strategy and various other things, brand strategy.
I'd say three things, one is that there's a clear demarcation between the 4G market and the 3G market. We're now very much focusing, verifying that the 4G market, the o.tel.o at the 3G market.
I'd say secondly the recent commercial rebalancing we did on the Vodafone side. So, bringing down our core tariffs by €5 but increasing the handset contribution by €5 a month.
So, commercial good but it also provided Vodafone with more value perception. And then thirdly, I'd say o.tel.o is an online only brand.
So, it's practical and controllable in our overall channel mix, so, very happy with the evolution of the German market from that perspective.
Operator
We'll now go to the line of Jerry Dellis of Jefferies.
Jerry Dellis
I've got two questions please, first question is on the outlook. As we look forward to the second quarter, should we expect service revenue trends to be flat relative to Q1, bearing in mind perhaps an incremental drag from roaming and perhaps also the new India pricing?
And then when we look ahead to the second half, and the margin expansion that you talked about embedded within the EBITDA guidance. Should we expect that margin improvement to be broadly based across the countries?
Or are there any particular ones that you would call out at this stage? And then a second question just about the Italian broadband market.
What sort of safeguards are in place around the pace at which Enel's fiber deployment proceeds? There, obviously, are publicly stated roll out targets.
But it seems as if, from the outside, there could be some risk of delay at least that risk isn't a trivial one. How would you maintain your retail competitiveness in the high-speed broadband market in the event that Enel's deployments were delayed?
Thank you.
Vittorio Colao
Well, these are both very good questions. So, why don't I take the first one, and we conclude with the outlook forward looking thing, which seems perfect way of closing a call.
So, the Enel rollout, let me tell you that we're pretty confident that the plan and feel September 18, is solid and this really achievable. It's a plan that calls for a ramp up from 30,000 homes per month to 60,000 - 80,000 homes per month.
We think it is doable. We compare to other markets.
Don't forget that it depends a lot on how cities are build, and multi-dwelling and apartment box and these things, make a huge difference here. So, that is not the, if you want to -- may view the challenge.
The real thing is once we got there, the next leg, the one that would finish in September 21, which would bring to the famous 7.5 million homes, that will require a lot of operational muscle because then the number of homes goes up rather significantly. But I would say, for the first batch until, let's say two years from now, two and half years from now, the numbers are fairly accessible and doable and the early indication is that everything is achievable based, so on our experience.
In the meantime, we continue to acquire. And again, then I go back to the earlier question, it will be in our interest to put on Enel's as much as we can.
But of course we will continue to work also on the old efficacy infrastructure and the wholesale infrastructure of Telecom Italia to maintain customers. There will be a point where, probably hopefully the more successful Enel is, the more we will say, well, we’re better off going straight with them and not doing.
But for the time being, we continue to a dual track strategy. But as I said, September 18, I would say, reasonable and doable, along the way we'll get more and more confidence that also the second bigger chunk is doable.
Nick, do you want to conclude with outlook and a wonderful bridge into October, November, in November, October, November…
Nick Read
Sure. So, just in terms of service revenue trends look, you're right to call out.
We have a little bit more of a negative drag on roaming in Q2. And as I pointed out, the top comps on South Africa and Spain, some underlying improvement in the business on the trends that we’re seeing.
So I would say, in aggregate, we’re going to be a little bit down on Q1 growth but not anything material before then start, let's say, underlying positive moment in the second half. I’d say in terms of EBITDA, the margin expansion, if you like, in the second half, I do see as broad based.
Why do I see that? Really, you’ve got to think in the second half.
There are couple of things are a little bit mechanical. So, first of all, we are starting to lap on the Spring-build.
So, we exited at a certain size of network and cost base, and we will be annualizing on that. We’ll be annualizing on the Spain football content increase.
Obviously, we’ve still got that pain in the first half but the second half should be lapping. The third is the UK customer operations cost.
The investments that we’ve may to recover acquisition in the UK. Again, we start to annualize on that ramp up of cost.
So, therefore, we would hope that that cost starts to move down. And then the fit for growth initiatives are starting to accelerate.
And of course we’ve got, what I’d really point out, is good quality service revenue growth. I mean whether it’s the fixed growth that we’re seeing, 60% of our net adds on-net, so good margin.
We’re seeing data. We’re seeing more-for-more, which is implicitly pricing as well.
So, I’d point to the quality of our revenue as well in second half. And, on that, Vittorio…
Vittorio Colao
Very good. Thank you.
Thank you for your questions. I think to conclude, I would say that we have made progress during first quarter, this first quarter of the financial year.
As we said, good performance in Germany, Spain and Italy, offsetting the challenges that we are working very hard to address in the UK, the much more-for-more propositions working on improving ARPU and growth momentum in AMAP remains strong with good performance in South America, Turkey, Egypt and ongoing recovering in India. And finally, as I said in my presentation, we continue to have the strategy centered on mobile data, fixed broadband, and the enterprise and this continues to be driving growth for the company.
So, thank you for your questions. Have a great break, for those of you, who can have it.
And see you at all the conferences in September. Thank you, operator.