Nov 14, 2017
Executives
Vittorio Amedeo Colao - Vodafone Group Plc Nicholas Jonathan Read - Vodafone Group Plc
Analysts
Maurice Patrick - Barclays Capital Securities Ltd. Polo Tang - UBS Ltd.
Stephen Howard - HSBC Bank Plc John Karidis - Numis Securities Ltd. Akhil Dattani - JPMorgan Securities Plc David Wright - Bank of America Merrill Lynch Spyros Nicholas Delfas - Redburn (Europe) Ltd.
Jeremy Dellis - Jefferies International Ltd.
Vittorio Amedeo Colao - Vodafone Group Plc
Good morning, everybody. Welcome to our Results Presentation.
I hope you enjoyed the videos. Today, we'll follow the usual order.
I will give you the highlight of the announcement, Nick will go through the financial reviews and then I will come back with some update on our strategy and progress on strategy, and then we go into Q&A. And as always, I'm asking you to keep the questions to one and I'm sure it will be one.
So, first half, I have to say we had a good start of the year, 1.7% organic service revenue growth, which is really 2.6% ex-regulation. We have got good growth and this is coming from both fixed and mobile, and from most of the markets.
13% growth in EBITDA, it's really 9.3% underlying once you adjust to a number of things, with margin at 32% or probably 31-point-something. Nick will cover all the details about our profitability.
But again, very solid profitability. Free cash flow, €1.3 billion, up €1.4 billion from last year.
This is a pre-spectrum number coming, of course, from higher EBITDA and working capital. And finally, the board this morning has announced a 2.1% increase in the interim dividend, €4.84.
This is consistent with our progressive dividend policy. As a result of all of this, we're raising today our full-year guidance.
I will not waste a lot of time on the summary of the strategic progress, but I can say and I will go more in detail in my second part of my presentation. I would say we keep working on the same differentiators, with good success on customer experience excellence, 19 over 21 market leading.
Good mobile networks, both voice and data, especially voice, but also both voice and data. And we continue to deploy on fixed – our smart capital strategy, and Nick and I will cover it.
And some indicators that we put on this page are indicating that the strategy is working. Increase in ARPU ex-regulation in Europe, still the fastest-growing broadband provider in Europe.
And ex-regulation, good growth in Enterprise. But even non ex-regulation, we have anyhow outperformed the market, so – but I will cover more later.
Commercially, we continue to have, what I will call, a robust commercial performance. As you can see from the red bars, we had good mobile, the lighter part, good mobile additions in the quarter.
This has been helped by GigaCube, which is our German fixed-wireless substitution product. But also in fixed 262,000, this is UK – sorry, this is Italy, Germany and Spain, but this time we also have UK with 33,000 net adds.
Europe service revenue growth, 0.8%, 2.1% ex-regulation, with a progressive penetration of broadband users, 61% of whom are on NGN. In AMAP, we continue to grow both in contract and in prepaid, we had a slightly lower growth at 6.2% in the quarter.
This is Vodacom, which we'll cover later, and also a one-week outage in Qatar due to network problems. But AMAP, the biggest and most important part remains, only half of the customers have data there, so the opportunity continues to be big.
You have the details of the performance in each market in the appendix of the documents, but let me cover at high level both Europe and AMAP. First of all, consumer NPS rank.
We continue to lead everywhere. We don't lead in the UK, but at least we have number two network in the UK.
We lead in Enterprise. And I have to say, the network, the customer operations, and billing problems that we talked many times about in the past are actually sorted out now and we have good expectation for what Nick Jeffery and his management team are doing in terms of results for the second half.
Going market by market, in Germany, we have a stable competitive environment. We are having good performance in mobile contract.
But I'm also happy that we have more than 60% now of cable connections coming at higher speeds, more than 200 megabit per second. Good performance in terms of service growth, 1.6%, with strong customer growth driving it.
But also almost 8% increase in EBITDA, which comes, of course, from revenue, but also I have to say even Germany now is starting to contribute on the cost front. Italy, competition remains intense.
More than a third of the activations are now below the line and very aggressive pricing. But despite that and despite the fact that we're lapping prior year price increases, 1.5% growth and a 9% increase in EBITDA, again coming from good cost action, but also a lot of good personalized offers that I will cover later in my presentation.
UK. UK is a stable market.
Actually, there are increases in ARPU both in mobile and in fixed. And I have to say that I'm happy to report not just that we had good performance on the fixed front, but also that on the mobile front we have an underlying stability of our contract, which is really the result of a growth in the Vodafone branded connections, which is a strong focus for our team, and some phasing out of non-branded old contracts that we had in the market.
If you strip out all the handset financing and the underlying one-off, we are back to underlying growth just about in the UK and we are stabilizing EBITDA despite the big investments in operations that I described. And finally, Spain.
Spain is a good market at the high end, medium end. It's very intense competition at the low end, mostly MÁSMÓVIL and the second brand of Orange.
But despite this, we have generated a 4% – almost 4% growth in the market, with essentially much more-from-more actions with some end of the handset financing lapping, but also a benefit from roaming, which in Southern Europe has been moved over the summer. And in Spain, again, an excellent job on cost, almost 10% EBITDA growth despite content cost, which in Spain are pretty high as you know.
AMAP, similar picture across AMAP. Number one almost everywhere, except Turkey where we are number two.
South Africa, South Africa is, what I would call it, a stable pricing environment. In South Africa, we are proactively working on data pricing.
You might remember we worked on voice pricing a few years ago, now we are doing the same to data pricing. We are increasing data bundles to reduce the effective data price in the bundle, but we are also decreasing the out-of-bundle data pricing.
So it's a, if you want, a self-immunization strategy from a pricing perspective, about 4% growth and 2.9% EBITDA growth in South Africa. Vodacom International is now 22% of Vodacom.
We have a good performance, 4.1% in revenue growth. This is a combination of Tanzania improving, DRC with macro pressure, but still 8.2% increase in EBITDA.
And finally, Turkey and Egypt. Turkey and Egypt today after deconsolidating India, they are a third of AMAP.
We have very strong positions in both markets. I have to say 14.7% growth in Turkey and 21% in Egypt are pretty good results.
I'm particularly pleased with Egypt where the second competitor has a growth of 7 points, 8 points less than us and the third one 15 points less than us. And as you can see, EBITDA margins – EBITDA growth in both markets is pretty good.
So, I would say both Europe and AMAP areas doing well for Vodafone. We need to talk about India, which is a little bit – it deserves a separate page.
As you know, in India, there's still pricing pressure. Competition is intense.
Prepaid validity has been extended and we also have now, of course, some pressure on postpaid. And as you can see, the quarter posted a minus 17.8% revenue growth.
This is the result of a minus 24% of ARPU, also you have some seasonality, also you have some tax effects from – the tax that has been brought from 15% to 18%. The good news is that we are stabilizing the margins.
The green bars below, 22%, clearly there's a lot of cost control and cost actions taking place. And we are focusing on retaining high-value users and focusing on our leadership circles.
We are investing the vast majority of our CapEx in the circles where we have leadership. There are positives in India.
Of course, everybody knows that Jio has raised prices recently again in October, that's a positive. Smaller players are getting out of the market, so there is consolidation of SIMs and customers and a more rational environment in the long term.
And we are progressing with the Idea merger. We are pleased to announce yesterday the sale of the tower assets, the orphan tower assets.
We're progressing in the discussions on the future of Indus. And we have got already SEBI and CCI approval and we're working to get DoT and NCLT approval in due time.
So, we expect the transaction to be completed during 2018. Looking ahead, in India, we will have some pressure from MTRs, MTR reductions are coming into place.
We'll continue to focus essentially on high-value customers and leadership circles until the merger is completed. And with that, I think I can pass to Nick for the detailed financial review.
Nicholas Jonathan Read - Vodafone Group Plc
Thank you, Vittorio. Good morning, everyone.
So, as Vittorio already highlighted, our financial performance in the first half of the year was very strong, and I was particularly pleased with the broad-based nature demonstrated (10:45) operational leverage. In May, I highlighted that we faced two extraordinary impacts during the fiscal year.
First, a material drag from EU roaming regulation and, second, a boost from the commercial decision to follow the UK market practice adopting handset financing. At that time, we had expected these two impacts to be broadly similar and offsetting.
But in the first half of the year, we ended up with more handset financing and a positive from visitor revenues. Combined with the two large UK regulatory settlements, this contributed to an even stronger performance in the first half.
Therefore, I will refer to our underlying EBITDA and EBIT performance excluding these items rather than our organic headline results as we really need to understand the real trends. Moving to the headline numbers on the left of the chart in green, our organic service revenue grew 1.7%, combined with reduction in our absolute operating cost delivered a 9.3% underlying organic EBITDA growth.
With the rate of increase in D&A expenses now moderating post the end of Project Spring and normalization of CapEx, we delivered a 36% underlying EBIT growth. On the right-hand chart, you see how our EBIT margins have inflected from the lows in FY 2015, at the start of the Project Spring, investment phase now back to around 10%, with further improvement to come given our focus on operational leverage.
As you are aware, each year, there are a number of non-cash items that impact our reported earnings. In order to present a clearer picture of our earnings performance, we adjust for these items as you can see in the bridge shown in the table.
I do not intend to go through the bridge in detail as these items are clearly explained in the press release, but I will cover our cash interest cost and cash taxes later on in the presentation. However, let me draw your attention to two important items.
Firstly, our group adjusted effective tax rate for H1 was 22.2% compared to 25% for the same period last year. This was primarily driven by a change in the country mix of group profits and a reduction in the corporation tax rate in Italy.
Secondly, it's important to remember that our reported share count has been inflated by the mandatory convertible that we issued at the time of the Verizon-Ziggo (13:26) merger. We've almost completed the share buyback of the first tranche and it's our intention to buy back the second tranche using the proceeds from the remaining $2.5 billion in Verizon loan notes.
Turning now to our service revenue performance, as the chart on the left shows, we have consistently delivered an underlying top line growth ex-regulation of around mid-2s. On a reported basis, our organic service revenue growth slowed in Q2 to 1.3% from 2.2% in Q1.
There were three drivers that accounted for this slowdown. Firstly, the impact of net roaming regulation, which was 30 basis points lower than expected given the higher visitor revenues.
We now expect the net roaming drag on EBITDA this year to be around €200 million. Secondly, as handset financing accelerated in the UK, we saw an increased drag.
The effect was small at the group level in Q2, but is likely to accelerate in the second half, reaching over 4 percentage points at the UK OpCo level and 70 basis points at the group level by Q4. Finally, carrier dragged on our results in Q2 by around 40 basis points quarter-over-quarter.
This was a result of implementing a new intelligent routing system that optimize the internalization of traffic, reducing both third-party revenues and cost, with a net benefit to EBITDA. The lower carrier offset a better than expected performance in Europe.
As you can see on the right-hand chart, excluding regulation, Europe accounted for 70% of group service revenue growth in Q2. When considering the outlook for the second half of the year, I'd say Q2 growth of 1.3% as the start point, given the new baseline of both carrier and wholesale.
We expect an underlying improvement in the UK to largely offset a slowdown in Italy, while the increasing drag from UK handset financing should be offset by reduced drag from regulation as we lap the German MTR from December last year. As you can see on the slide, we have contribution of our three growth drivers to our overall service revenue growth in H1.
In the circles above the bars, you can see the changing contribution compared to H1 last year. In other words, whether that growth driver is accelerating or decelerating.
Excluding regulation, European consumer mobile growth continued to improve, reflecting the impact on ARPU of our more-for-more commercial actions in the period. Vittorio will be covering these in more detail later.
Data growth in emerging markets remained robust, but its contribution reduced reflecting stronger comps and bigger data bundles in South Africa. Our continued commercial momentum in fixed and convergence provides a long-term structural contributor to growth, a key point of difference when comparing to our European peers as we discussed at the Open Office event in Venice.
And Enterprise continue to outperform declining incumbent peers, delivering resilient top line growth and stable contribution. On the right of this chart, the drags from regulation and wholesale will clearly reduce over time.
Moving on to our cost base, I'm pleased to confirm that even with the sustained commercial momentum in both regions, we remain on track to deliver an absolute reduction in our organic operating cost for the second year running. Our top line performance combined with lower interconnection cost supported a strong gross margin performance offsetting higher year-over-year fixed wholesale and content cost.
Meanwhile, net operating cost reduced in absolute terms by €0.1 billion, despite inflationary pressures especially in emerging markets, along with experiencing 65% data traffic growth on our networks. This is a result of our increased focus on direct channels, the mix shift towards SIM-only, and the general Fit for Growth initiatives.
On the right, you see the €0.2 billion net benefit year-over-year of regulation, UK handset financing, and one-off regulatory settlement. The result of that better top line growth combined with a decline in operating cost has led to a sharp improvement in our underlying EBITDA margins to 31.1%.
This is now the third year in a row where the group has improved EBITDA margins. This is the result of key programs you see at the bottom of the slide, which Vittorio will cover in his presentation, along with exceeding the synergy targets from our acquisitions of KDG and Ono.
On average, over the past three years, we have expanded our margins by just over 80 basis points per annum, whilst reinvesting to strategically strengthen our long-term position. We believe our Fit for Growth and Digital programs provide a sustainable platform to deliver continued margin progression over the coming years.
These programs have enabled us to deliver systematic margin improvement across the group as you can see from the chart. Within our larger controlled operations, only one market saw a meaningful EBITDA margin decline, which was South Africa.
This reflected strong low-margin handset sales and cost phasing and, therefore, we're confident that we can see an improved second half EBITDA performance. In May, I said we expected the UK business to stabilize EBITDA on an underlying basis in the second half of the year.
But I'm pleased to report that our execution is ahead of plan, coming close to stabilizing in the first half. In our current and future JVs, VodafoneZiggo saw an improved sequential performance in the quarter, with EBITDA margins rising year-over-year, thanks to lower handset subsidies.
The JV has raised its outlook for the year. And despite continued revenue pressures from regulation, mobile repricing, and the initial cost of driving convergence, we remain on track with our plans with substantial synergies to be reflected in future periods.
As Vittorio has already described, India remains very challenging, although I'm pleased that we have been able to stabilize our EBITDA margins in recent quarters despite further top line pressure. Fit for Growth has been an important contributor to our ability to invest in new areas, whilst improving our margin.
And on this slide, I detailed some of the progress we've made in recent years. The program consists of a number of group-led efforts, some of which you see summarized on the left of the chart.
We've increased – centralized our procurement activities now up to 77% of purchasing from 60% three years ago, releasing very large cost savings. We have also built and then scaled through centralization our shared service centers focused on IT development operations, network operations, customer back office, and finance HR processes with almost 22,000 employees now based in India, Egypt, Hungary, and Romania.
We have saved around €500 million in annual cost over the past three years. Standardizing network design across OpCos has been another big win for us, worth around €340 million per annum.
And we've reduced our group corporate overhead through ZBB efforts by over €200 million. Finally, on the right, you see the three-year movement in our large markets demonstrating our use of A.T.
Kearney benchmarking by process to target world-class performance levels. This is before we talk about the opportunity digital presents for our business.
So let me now turn to that opportunity. Vittorio will provide you with a detailed overview of the transformation we aim to achieve in customer experience relative to our peers, and along with it, the relative revenue opportunities from our new Digital Vodafone program.
So, on this side, I would just focus on the potential to maintain our recent progress in reducing absolute operating costs. There are three main areas of opportunity for digital efficiencies: customer touch point, technology management, and support operations.
Acquiring, interacting and retaining customers digitally will have the secondary benefit of allowing us to optimize our channel mix, increasing our low-cost direct mix, while saving costly commissions paid to third parties, as well as allowing us to reshape our retail footprint. In addition, supporting customers will be far more efficient and effective given new AI applications such as chatbots and virtual agents.
In total, we spend around €5 billion today on these customer-related areas. We also see scope for efficiency gains in our network and technology cost by using the power of real-time analytics to enable smarter network planning and predictive maintenance.
In addition, we aim to lower IT cost by moving 65% of IT applications to the cloud. We would therefore expect more than product – drive more productivity from the capital investment that we have to ultimately drive greater differentiation in network quality and customer experience.
Finally, we spend around €3 billion today on support activities, many of which can be simplified and automated through robotics. This is will be a multi-year effort which will require some upfront investment over the next two years and the rate of savings will depend to some degree on customer behavior shifts and the need for us to reinvest, but the opportunity is clearly material.
Moving on to CapEx, our capital intensity was 14.1% in the first half, 60 basis points lower than the last year. For the full year, our position remains unchanged, expecting to be in the top half of our 14% to 16% range, with seasonally higher CapEx levels expected in H2.
On the left, you can see we have allocated CapEx across our top five markets, which make up about 65% of our local CapEx spend. The key movement was the increase in the CPE and success-based CapEx, up 9 percentage points year-over-year, reflecting the strong commercial momentum we have in fixed.
Excluding CPEs, our capital intensity was 12.5%. As a reminder, our mid-term mid-teens capital intensity guidance excludes material incremental fiber build opportunities, such as the €2 billion gigabit investment plan in Germany, which we will report on separately in future results.
As communicated in September, we do not expect a material cash impact from this plan in the current fiscal year as we scale up our operational capabilities for a faster deployment in FY 2019 and beyond. We have no more further plans of this magnitude on the current horizon.
Free cash flow on a guidance basis increased by €1.4 billion year-over-year. This improved performance was principally driven by higher EBITDA, lower capital creditor outflows reflecting the final Project Spring payments in the prior year and higher net dividends received.
Cash interest expenses were higher than last year, where we benefited from a number of timing differences. For the full year, we still expect cash interest costs of around €800 million and a mid-term average net cost of debt of 2.5%.
Cash tax is expected to be slightly higher at €1.1 billion for the full year, given higher profits. Dividends received grew primarily due to VodafoneZiggo.
Following their results and their upgrade to guidance, we now expect to receive higher total cash returns this calendar year. Dividends paid to minorities fell, primarily Egypt.
Clearly, the true free cash flow available for returns is the cash left after spectrum and restructuring cost paid. This figure will be highlighted in our presentation and future releases.
However, given that both of these items tend to be volatile, we'll continue to exclude them from our guidance free cash flow, which will be characterized as free cash flow pre-spectrum going forward. During H1, we had spectrum payments totaling €0.8 billion in both Italy and Germany.
Assuming the UK spectrum auction slips into FY 2019 and given modest cash restructuring costs of around €300 million expected for the year, we expect free cash flow post-spectrum and restructuring cost to exceed our €4 billion dividend commitment this year. Moving to our balance sheet, we reported closing net debt of €32.1 billion with leverage of 2.2 times.
During the first half, cash outflows included the payment of FY 2017 final dividend of €2.6 billion, spectrum purchases in Italy and Germany, and the commencement of our share buyback program for the first tranche of the mandatory convertible. These items were partly offset by free cash flow generation in the half, the €1 billion of net proceeds from Vodacom stake disposal and FX movements.
For the full-year, we expect net debt to be around €31 billion, with payment of the H1 dividend and the remaining share buyback being more than offset by free cash flow generation in H2. Net debt in India, which is not included in the group's net debt position, declined to €8 billion, almost 80% of which is spectrum-related debt.
This was down from €8.7 billion at the end of last year, entirely due to the devaluation of the rupee compared to the euro. Capital allocation is a key focus for Vittorio and I, as you can see from the chart.
In Europe, we have further deepened and strengthened our position in fixed, where we've signed in the period three strategically important agreements using a, well, capital-smart infrastructure strategy, which Vittorio will cover in more detail. In Africa, we completed the exchange of our 35% indirect interest in Safaricom for Vodacom shares and the sale of a 5.2% stake in Vodacom.
In Other AMAP, we have begun exploring the potential for an IPO of New Zealand. This is an attractive asset, and we anticipate strong demand.
In India, we remain focused on closing the merger with Idea and pre-planning to ensure a fast start to realizing the $10 billion of CapEx-OpEx synergies. Yesterday, we're pleased to announce the sale of the standalone towers for a combined consideration of $1.2 billion, which will support the reduction of net debt for the JV.
The combination of this improved pricing environment, tower disposals, targeted synergies and proposed extension of spectrum payment from 10 years to 16 years are all important factors for establishing a sustainable capital structure for the JV. In addition, we have the 42% stake in Indus.
Using a Bharti Infratel valuation would value our stake at over $5 billion. We are active in discussions on multiple options, including tower merger, a partial or full stake sale to a third-party or IPO.
All of these options have different timing and tax considerations. Given the strength of the group's balance sheet, we will focus on maximizing long-term value.
And finally, to finish on guidance, we now expect EBITDA to grow organically by around 10% compared to our original guidance of 4% to 8%. This implies a range of €14.75 billion to €14.95 billion at guidance FX, which at the midpoint is around €600 million higher than the original outlook.
Broadly, around €300 million of this improvement in the outlook has come from non-recurring benefits I described earlier. However, the remaining €300 million of the upgrade reflects stronger-than-expected underlying European margin performance, as well as later-than-expected commercial launch by a new entrant in Italy.
As a result, we now expect underlying EBITDA growth of over €1 billion at the midpoint. It is worth noting that the UK handset financing boost this year does not flow to free cash flow, as it reverses out through working capital.
However, the good news is that the stronger underlying EBITDA growth of €300 million, together with the €100 million lower roaming drag, will flow directly to free cash flow. Together with our unchanged CapEx guidance, we now expect free cash flow to exceed €5 billion.
And on that, I will hand back to Vittorio.
Vittorio Amedeo Colao - Vodafone Group Plc
Good. So, let's have a look at how the strategy is progressing.
Always useful to start with the customers, what the customers say. As you can see, we continue to lead in consumer NPS, actually a little bit more than the same quarter of last year.
Here the good news is that not only we are leading in 19 out of 21 markets, but I'm happy to say that we have improved our position in 15. We have improved the absolute score in 15 and we have increased the gap in 12.
So, good on consumer. We continue to be good and solid on Enterprise, where we lead in 19 out of 20 markets.
And I have to say the key measures that we look at for assessing how good is our infrastructure, how good is our support, continue to give good results. 91% of our mobile data sessions are above 3 megabit per second.
We are offering speeds of 1 gigabit per second in four markets, and of course, we want to extend to all the other markets where we can. We have a good penetration of our digital app, which is very important.
I will cover about it later in my presentation. And we have two-thirds of contacts with the customers that are resolved at the first level.
This is not fantastic. The fantastic one is the countries which are already at 70%, 80%.
So, we want to push everywhere, everybody there. This remains the key thing that we look at in judging our strategy, how happy are the customers with our service.
Let me now cover the three areas of mobile, convergence and Enterprise to see how our progress is there. And in mobile data monetization, I would like to cover both the revenue and the cost aspect, because I get a lot of questions from investors on this topic.
So, we have continued with our much-more-for-more actions that you are very familiar with. This has been the period of Vodafone Pass.
Vodafone Pass is the ability for the customers to pay a little bit in order to get unlimited worry-free access to a service, video, music, chat, social, whatever. We now have around 8 million active customers on Vodafone Pass, and Vodafone Pass is active in nine markets to-date.
It says seven on the chart because it's clearly only the first half. So, Pass is good because it's driving both ARPU and usage.
The example in the center is the Italian example. In Italy, we have an average usage of 3 gigabytes per month.
This cohort, which were clearly the early adopters of Vodafone Pass, was a 5 gigabytes to 9 gigabytes type of cohort. As you can see from the chart, Pass has added 3 gig to 5 gig per month of the specific Pass service to the usage of the customers.
But the good thing is it also lifts the usage outside the Pass. And we have early indications that around 30% of the customers would take the Pass, then they stay with us and they continue to pay the €3, €5 whatever per month additional.
The German implementation on the right goes straight into ARPU accretion. We increased the price of the bundle by €3.
We include one Pass of choice and then customers can add other Passes. So, I would say this is again a demonstration that you can work on both increasing usage and ARPU at the same time, which we think is what customers want.
Then the question is how is ARPU going? I suggest we concentrate on the second set of bars, the underlying ones, and the sum of it is that ARPU underlying is up between 2% and 4%.
This is very important, because it's up despite the fact that actually we are pushing much more SIM-only in the market. SIM-only, on the right, you see are between 20% and 30% of the base, but they are 40% of the new customers.
So, on one hand, they depress a bit service revenue. But on the other hand, they also depress acquisition and retention cost, which is clearly very strategic.
So, I would say it's very important that we see our much-more-for-more actions as both customer-friendly because they allow more usage, but also company-friendly because there is some more ARPU attached to it. Then the question I often get is, well, data monetization is also about costs, how are your costs going?
And here, I put on this slide a few thoughts about the cost. First of all, data traffic is clearly growing.
It's growing because there's more demand. It's growing because we do initiatives like the Passes.
It's growing because visitors are clearly – and roaming is clearly being unleashed now. It's also growing because people are moving away a little bit from WiFi.
We have seen a decline in usage of WiFi by 4 points. It is obvious because the networks work well and also the allowances are more generous, so people can use them.
The result is, as you see in the black dot, a 62% increase in usage and a usage which is now, in a couple of years, went from 1.1 gig per customer per month to 2.1 gig. So, the question is how is the cost handled?
On the right, we put our network costs, which are clearly relative to that type European network cost, that type of usage. As you can see, there has been a very, very marginal increase in cost from €100 to €102.
Now, this is a 30% to 35% unit cost reduction per year, which is very good because it allows us to follow the data monetization in a very cost efficient way. Think that 4G+ is around 40% more efficient that 4G.
But what we have in front of us is 5G, which is 400% more efficient than 3G due to spectrum efficiency reasons. So, we think that this data growth can be followed pretty well.
There is often a question that I get about the density of the network. Often it's in relation to the U.S.
examples. Don't forget that in Europe, 5G will be implemented on lower bands, not the millimeter waves.
So, the density of the network will be different, and most of it – and Johan can take questions, if you want, later. Most of it will be built on the 1,800 MHz grid.
So, we already have the infrastructure – most of the infrastructure that will be needed for 5G. And finally, backhaul and transmission cost, yes, there will be more.
But with a smart mix of fiber and high-speed microwave, which by the way is also increasing from a technological point of view, we also think that that trends can be respected (39:06). So, we see an increasing amount of data usage attached to some increase of ARPU and a very, very good decrease of cost.
Data monetization, I would say, looks good. Now, there's also another aspect of data monetization, which is extending our reach.
We announced last week the launch of consumer IoT. Consumer IoT is expected to multiply – every estimate is valid here, but let's say between six, seven times in the next four or five years.
We launched last week a category brand for that, V by Vodafone. We launched four initial products, V-Auto, V-Camera, V-Bag and V-Pet.
These are fixed-price plans, €3, €4 or £3, £4 per month that can be added to the main subscription of the customer. For the time being, we launched four markets, and of course, we want – only in direct channels, and of course, we want to extend to all markets, all channels, but also the non-telco channels, because these are not necessarily products that we need to handle ourselves.
Now, why would Vodafone be good and strong in this? Well, first of all, remember, we are leader in industrial IoT, which is our Enterprise platform, 62 million SIMs active on it, probably the biggest in the world.
The experience of adding these new little objects is very easy and very seamless. I did myself my own – I don't have pets, but I activated my wife's car, so I can see where she is this morning and where she goes, and she can do the same to me, to be very clear.
And it's very easy. I activated literally in 12 minutes just by adding £4 to my subscription.
And of course, then it goes into the charge-to-bill platform. So, we can activate also third parties.
And the big ambition here is to invite all third parties to create connected devices. We will give them building, we will give them provisioning, and it will be very easy.
In the fourth quarter, we will start with developers. Our ambition is to have a full ecosystem sometimes next year.
Now, the second area of growth for us has been fixed and convergence. Nick has already talked about this.
Left chart is the well-known chart. We have around 99 million of commercial footprint for our NGN.
Of this, 42 million are on special conditions and 36 million owned NGN network, and we keep building. On the right-hand, you see the progress so far, 1.2 million broadband net adds.
We are by far the fastest growing in Europe. We have around 12 million NGN users, which is 70% of our broadband base.
Added 1.8 million just on NGN in the last 12 months, and this does not include Ziggo. 4.7 million users, 1.4 million including Ziggo is the number.
700,000 is what we added as Vodafone. So, we are pushing with convergence.
Now, the important point is that we're doing it with what we call a capital-smart strategy, a strategy that continuously optimize itself based on alternatives that we create in the market. Since the last time we met, we announced three of them.
One is the Gigabit Investment that Nick has talked about. This is really business parks, rural homes and the upgrade of cable.
The beauty of it is that it gives us incremental growth with a relatively limited investment, but also a very good customer perception in a country that needs the Gigabit Plan. We announced UK CityFibre.
CityFibre allow us to go up to 5 million homes with an exclusivity period and 20% commitment on our side. Now, the other beauty of CityFibre is that, at this point, this will put some trade-offs in front of Openreach.
They will need to decide whether they want to keep prices high, and therefore, create a market for CityFibre, or whether they want to invest and take prices low, in which case, we will be very happy to work with them. So, again, it's the circle of reinforcing the strategy along the way.
And smaller, but not to be neglected, also in Portugal, we announced a deal with NOS. Again, same story, it was not easy to – or possible to find an agreement with PT.
Therefore, we went with NOS, and the result is that now PT will have the competition from both us and NOS in 80% of the homes of the country. So, the strategy works, we are the fastest growing, but we are growing with a lot of capital discipline and a lot of smart strategic deployments.
And finally, Enterprise. Now, Enterprise, the red bar looks like we grew 0.5%, which is true of course.
It is a bit less than the previous quarter. But if you go ex regulation and the other impact, in reality, it's really 2.5% at the same level.
What is going on here? What's going on is a decline in mobile ARPU.
Mobile ARPU is under pressure. So, 4%, 5% (44:16) decline, but we are increasing customers, and most importantly, we have a strong presence in emerging markets and we have a strong growth in fixed.
And the result is on the right, you see Vodafone is the red bar. Here, we take not the underlying, but the reported number.
And you can see that versus our worldwide competitors, we are doing either a bit better or really much better. So, I'm sometimes asked how come and how can you do it.
In the center, we listed some of our advantages, what the customers tell us that we have. It's geographic reach, which is not just the ability to price internationally, but also the ability to support internationally.
It's the fact that we have a greater presence in emerging markets, 17% of the revenues now is AMAP. We don't have old legacy voice, which – fixed voice, which of course is dragging some of our competitors.
And we have the IoT platform, which is more and more mentioned as a reason to engage with Vodafone. So, to conclude this part, I would say mobile data monetization, convergence and Enterprise, the key elements of our strategy are delivering and not just financially, but also operationally.
Now, going ahead, what do we have ahead of us? Let me remind you the context, as Nick has already said.
Nick had arrows. I have a snake.
But the concept is the same. We started in 2013/2014 with Project Spring.
Project Spring was about strengthening the quality of delivery. Then, Nick has started Fit for Growth.
Now, Fit for Growth is a great program to deliver cost, but I would not underplay also the modernization aspect of it and the upgrade aspect of it, which is now important, but I believe will be more important – even more important in the future. Then, a couple of years later, we started with the Customer eXperience program, which is really aimed in making the customers perceive the difference and get rewarded if they are loyal.
And everything is now converging into Digital Vodafone, which is our bigger transformation that will lead the company in the next few years. Let me talk about it, because I think it's very important.
First of all, what is Digital Vodafone? Here, I don't pretend to be particularly creative or innovative.
Like every other company, we want to have the most engaging digital customer experience. Here, we really want to blend the best of our physical assets, which tend to be people or usually retail shops, with a digital interaction that is easy, instantaneous, but most importantly, personalized.
Three main aspects, the customer side, which is in the end the continuation of our Customer eXperience program, so building differentiated experience. The technology aspect based on data analytics and the use of all digital information to improve and personalize offers, so make the offers more effective with the customers, but also more efficient for us to deliver.
And finally, in operation, delivering better allocation of CapEx, simplifying products and services and platforms to what really delivers the higher return on investment for our money, and of course, automation, as Nick has described, to drive efficiency. So, Digital Vodafone, it is about costs, and of course, the cost opportunity is big, but it is also, and I think as importantly, about revenues and about reducing churn.
Let me give you a few examples, starting from the digital customer experience. First of all, the marketing, we really want to max out on Big Data analytics and digital media capabilities to deliver predictive and personalized offers everywhere throughout the Vodafone footprint (48:09).
This is about ARPU enhancement. The best example is the AI engine that we have in South Africa, which has delivered with Just 4 You already 800 million bundles sold now, and of course, allows also much less replicability from the competitors, because offers become one-to-one.
The second is the sales aspect, and here really it's about focusing on digital channels and giving instant access to services at a much lower cost. We are selling these days in Italy a product which is called Shake Remix.
Now, it's not really a product. It's more than 400 different products that the customer can choose among data options, minute options, SMS options, self-select from the My Vodafone App, which is very instrumental in this, shake the phone and get it done on the bill, a little bit like the consumer IoT thing that I was describing before.
This is delivering much lower commissions and a much better commercial efficiency, but also more effectiveness. Since October 4, we had activations up 12%.
And the third is clearly care through the use of more artificial intelligence and chatbots. In the UK, we introduced it over the summer.
It's faster and easier for the customer, so with a higher NPS result, but it's also much cheaper for us. We are already at a point where the chatbot in the UK understands 90% of the time correctly what the customer request is, and this is just few months in operation.
So, a lot of digitization will happen on the commercial front. What about technology and operations?
First of all, Nick mentioned smart CapEx. This is really about deploying based on profitability.
In Germany, we use a customer profitability model to increase CapEx efficiency. CapEx are very high – or relatively high in Germany.
We want to be sure that they are deployed in the right place. So, this is a financial allocation of CapEx as opposed to a pure technical parameters defining where CapEx go.
The second aspect is introduction everywhere in Vodafone of what is called DXL. It's the Digital eXperience Layer.
This is a layer that you put on top of your legacy systems to avoid having to touch every time the big IT systems, expensive IT systems that we have and also to give a much faster time to market. We introduced it in the UK first.
The example on the slide is Alexa. We developed the Vodafone Alexa Skill just in a weekend.
So, without touching the main systems, but working at the layer above. This is going to be introduced everywhere in Vodafone, and it's a big change in the architecture of our systems to deliver a better digital experience and lower cost.
And again, Johan is here. I think he would be happy to take questions on that.
We are, like many companies, introducing the agile operating model in our unit. This is mixing in essence commercial and IT people within the unit to go to very, very fast delivery cycles.
The example on the slide is the UK. From the first idea to the first customer, we developed in eight-month a full complete internal MVNO on the youth proposition called VOXI.
And again, this is what will power in other markets, which I will not mention here, the ability to develop second brands and other offers in a very, very quick cycle and inexpensive cycle. And finally, automation and simplification.
Nick mentioned the 22,000 people that work for us in shared service centers. We're introducing automation – we have introduced automation everywhere.
The improvement in productivity is between four and six times the processes that they replaced. So, again, it's speed but it's also cost here that will change completely.
So, what's the ambition for Digital Vodafone? I would say the ambition, first of all, is big, but we don't start from nothing, as I said.
We already have 60% of penetration of the app in Europe. We have chatbots already everywhere.
It's not just in the UK. Just to give you an example, in Italy, we have already between 500,000 and 600,000 interactions per month which are managed by chatbots.
We will increase the number of bots in operation from 100 today to more than 200 by year-end, and we are progressively changing the organization everywhere. We have four big ambitions here, and these are real numbers.
We want to increase the amount of customer marketing campaigns powered by data analytics from 15% today to 100%. Now, 100% is the future, but we have a short-term objective of 25%, which will be sometimes next year.
We want to move our digital share mix from around 10% today in terms of channels to more than 40%. This is not just for following the customers.
This is also because especially indirect channels have economics which are pretty bad for us, and therefore, going digital will also improve the economics there. Move the support channel from today which is mostly human and a bit digital to mostly digital and very good human in the future, and introduce customer profitability analytics to drive commercial CapEx and – commercial investment and technical CapEx allocation from four markets to all markets.
Now, Nick has said that this is a multi-year program. Of course, it is a multi-year program, but the beauty of what we are experiencing in the first year of implementation is that early gains are very quick and very possible.
So, the ramp up, especially in the commercial front, would really be in the next 12 to 24 months. So, before concluding, one final word on the brand.
You watched the new videos. We moved the positioning of the Vodafone brand, and we did it after a lot of study and a lot of thinking, from the empowerment space, where we were before, to the – which was power to you, to the future is exciting.
Ready? Why did we do it?
There's three reasons for this big change. The first one is really a strategic reason.
Empowerment is a great concept, but we had evidence that technology in some areas is becoming more complicated and more frightening. We wanted to put Vodafone into the space of inspiring optimism and inviting people to readiness, to be ready for innovation and be the reassuring entity.
There's a lot of concerns out there on privacy and security and other things. Vodafone is making big investments there.
So far, we have been also good and we are recognized as good in that area. We thought it was a great idea to own that space and put Vodafone into the positive optimism for the future with an invitation to be ready.
The second is to be – it was quite frankly to be much more branded in our communication. We want customer benefits to be clear.
As you can see, whether you talk about unified communication on the right, working from home in the middle, deploying fiber or even applying for a job, the customer benefit of being associated with Vodafone has to be very clearly spread, because we want to strengthen our brand consistently with our MVNO, direct channel and digital strategy. And third, quite frankly, I think our colleagues here did a wonderful job in making it a little bit more modern, a little bit more elegant in terms of appearance.
And I'd say the early acceptance is very good, and again, it's going to reinforce our focus on NPS and customer excellence. So, to conclude, I think we had a pretty good first half, which I'm pleased about.
We continue to have leading customer experience and network quality as our big pillar. We progressed well market-by-market in our smart NGN strategy that we've been describing for many years.
Our three growth engines continue to work well, mobile data, fixed/convergence, Enterprise. Fit for Growth is delivering cost saving, but most importantly it's also delivering a modernization, which is very important for the future of Digital Vodafone.
And then Digital Vodafone, we have a big ambition there to generate not just cost reduction, but also incremental revenue. And as a result, we increased the full-year guidance at around 10% of organic EBITDA growth and excess of €5 billion for the free cash flow.
So, with that, I would conclude and say the future is exciting, ready for questions.
Vittorio Amedeo Colao - Vodafone Group Plc
And here, I need to remind you two things. One, one question each, please.
Yeah, let's start, Maurice, Simon (57:13), Akhil, and then we go back there. Yeah?
Maurice Patrick - Barclays Capital Securities Ltd.
Yeah. Hi, it's Maurice from Barclays.
So, only a distribution question. You've talked a lot up in the presentation about changing the distribution mix and more digital interactions, decreasing impacts on indirect channels and so on.
Have you seen much mix – so much (57:37) change in that so far this year? I see freenet (57:41) is still delivering very strong growth in Germany, for example.
It feels like in markets like the UK and Germany, there's still a very strong reliance on the indirect sector. So, have you seen much change in that this period and how quickly should we except to see a change in the coming periods?
Thank you.
Vittorio Amedeo Colao - Vodafone Group Plc
We have reduced, in Germany, our reliance on the indirect channel. As you correctly say, it is still very important, and we are not going to take it to zero, of course.
But the reality is that economics from indirect channel, especially in Germany, are not very good. So, it's not that we are ideologically against working with partners.
But if the partners take too much money to do the thing that we can do our ourselves in our own shops or even better digitally, over time, this is going to be the trend. I think Germany now is the place where we have is less than half, but it's still the highest.
Then, we have Italy for different reasons. There is a lot of indirect, but it's a different type of indirect.
It's more a fragmented indirect. And then, in other markets, quite frankly, we have reduced considerably.
And I think this is the trend in the market. Sometimes competitors don't follow, so you have to a little bit play, but it's not an ideological position.
It's just driven by NPV and return on investment considerations. And my sense is it's going to continue with Digital.
Simon – Simon, (59:02), Akhil?
Unknown Speaker
(59:07-59:33)
Vittorio Amedeo Colao - Vodafone Group Plc
Yeah.
Nicholas Jonathan Read - Vodafone Group Plc
Maybe a way of sort of explaining is to look at our EBITDA performance underlying in the first half, because I think it really says the story. So, you've got the 9.3% underlying EBITDA growth.
That's €600 million. Of this €600 million, operating cost reduction in absolute is €100 million.
And then basically, you've got a 50% split between more-for-more, ARPU actions, et cetera. So, Spain is a good example where you saw the – this quarter a full quarter's worth of the pricing action that we took in the previous quarter.
And then, the other half, I would say, is more base growth, primarily driven by fixed, but also a contribution from mobile.
Vittorio Amedeo Colao - Vodafone Group Plc
Polo?
Polo Tang - UBS Ltd.
Yeah. Hi, it's Polo Tang from UBS.
Just a bigger picture question really, just about EU regulation going forward, because we obviously had some push-back recently from the European Parliament against a move towards deregulation in return for investment in infrastructure. Separately, we're also seeing a move towards regulation of cable.
So, what's your view in terms of how things will evolve ultimately and the impact on Vodafone?
Vittorio Amedeo Colao - Vodafone Group Plc
Yeah. It's a very good question, Polo, but it will require a separate conference on it.
I have here my briefing. I was counting over the weekend when I was preparing, we have 10 key issues that are being debated, and finding a graphical way to represent who spends for what is almost impossible.
You need a multidimensional thing. The reality is that most of the proposals of the Commission, we are in agreement with, and we think they are good.
There's only one that we have slightly different opinion. And we think that the balance between competition and investment and protection of customers and protection of financial, I would say, health of the industry is pretty good at the Commission level.
Parliament is halfway there, and we will know by Q2 next year probably where it goes, especially on this concept of joint dominance and collective power that we are spending a lot of time – I am personally spending a lot of time explaining to them why they're going in a way which, in our view, is not positive. And the Council, i.e., the countries are a little bit depending on the issue either here or there, and it's sometimes more difficult to get agreement there, because they represent more national interest.
We think that the line of the Commission is the right one, and we are supporting the line of Commission on almost all issues. And I'm moderately optimistic that we will get out of this process most of the things right.
When I say most, I don't expect, for example, on the spectrum life that it's going to be extended as much as we thought, let's say, eight or nine months ago, for example. But on the other topics, I think some balance will be found, and the Commission interprets probably the best – the most pro-industry vision.
Stephen? Yeah, Stephen and John?
Thank you. (01:02:51).
Stephen Howard - HSBC Bank Plc
Thanks. Yeah, Stephen Howard at HSBC.
I was just wondering, following on from your announcement of the collaboration with CityFibre, and obviously, you've got the Gigabit Investment Plan in Germany. Just given that you're therefore sort of placing bets on FTTP, it's interesting to see in the release that you're also calling out the success of the GigaCube product in Germany.
And so, I was just wondering, to what extent had you considered fixed wireless access solutions as your route to market in places like the UK and more widely in Germany? And why did you wind up rejecting that in favor of going with a more FTTP rate, because obviously it's a slightly different from, say, the U.S.
carriers?
Vittorio Amedeo Colao - Vodafone Group Plc
Yeah. No, no.
Okay, this is clearly inspired by the U.S. – the continuing saga on U.S.
fixed wireless access as a 5G concept. Let me try to simplify things.
First of all, what is the GigaCube? What is the need for a, let me say, wireless access that you see in normal situations?
It's second homes. It's working in multiple locations.
It's having some kind of a known permanent secondary, I would say, location where you need to get high-speed broadband. That's the thing.
It has to be in a not super highly dense area, because if everybody gets that in a super highly dense area, then you need a lot of spectrum. Hence, it can be a replacement for a fiber.
But again, it depends on the place, it depends on the circumstances. So, it's a great product.
We will probably roll it out in many more markets, but it's not the ultimate solution for highly populated areas. For highly populated areas, at the end of the day, fiber will be the most efficient way, the best way to deliver broadband in the future.
The U.S. 5G story is really a story of not very densely populated areas, places where you can put an antenna on your roof or outside of your window without a big problem and cabinets that are very close to the neighborhood which you want to serve, which could work in Europe somewhere.
We are looking at it. And not later than two nights ago or three nights ago, I was discussing with one of the major vendors about this.
But it is a very, very specific solution for, say, I don't know, I always say Sardinia (01:05:30) or a place where you don't have a density, which allows the build out – the efficient build out of fiber. Yeah, John, Akhil, Robert (01:05:39)?
John Karidis - Numis Securities Ltd.
Thank you. It's John Karidis here from Numis.
I just wanted to ask about India, just some information, please. I just sort of wondered whether you could expand on what's left to be done there in terms of the Idea deal and whether, at this stage, at the end of 2017, you're able to refine a little bit your estimate of when the deal might close.
Vittorio Amedeo Colao - Vodafone Group Plc
Listen, we had good progress and it was frankly quicker than what we thought in certain aspects. But we still have to get DoT approval and we still have to get the court actually approving the merger scheme.
So, those are the two most important things. There is still maybe a RBI, something application for the ownership, but that's a relatively minor thing.
But those are the two things that are still to be done. We still expect them to happen in 2018, and we cannot give you – yeah, I don't know, midyear.
And then, don't ask me mid calendar or mid financial, because I will play between the two. So, I would say somewhere, so we don't know.
I think last year, we said September 2018 or kind of...
Nicholas Jonathan Read - Vodafone Group Plc
Yeah, 12 to 18 months.
Vittorio Amedeo Colao - Vodafone Group Plc
Yeah, 12 to 18 months. 12 to 18 months leads to September 2018 really.
So, that's what is the status today. Yeah, Akhil?
Akhil Dattani - JPMorgan Securities Plc
Yeah. Hi.
Just a question, I guess, just broadly on fixed line strategy. Both of you have gone through today some of the interesting deals you've announced in the last few months in a number of your markets.
Obviously, fixed line is a big growth tailwind for you as a business. It's very high return on capital in terms of the new initiatives.
So, I just want an update in terms of how are you thinking on the overall build versus buy. It's always been case-by-case.
But does it at all shift the way you're thinking, given the deals you've managed to sign here? And also, I guess linked to that, it was partly linked to the earlier question from Polo, the joint dominance kind of debate, has there been anything new around that and how are you feeling on that relative to what you told us back at the Investor Day in Italy.
Thanks.
Vittorio Amedeo Colao - Vodafone Group Plc
Yeah. I can only say that, by definition, the strategy on fixed has to be country-by-country.
It has to be country-by-country because the way it works, because the infrastructures available are different, because the cost of building in certain areas in Portugal, in Spain is completely different than the cost of building in Central London. This morning, I read that we might use the sewage system in London, which by the way is what they also do in Spain.
And in some places, you can put fiber on the poles, and in other places, the poles fall apart, fall down if you put them. So, it is so local that it has to be a case-by-case, a country-by-country analysis, and sometimes even within a country, it's also region-by-region, point number one.
Point number two, it also depends a lot on the strategy of the incumbents. Incumbents tend to resist and tend to say, I do it but it's for me only, and if it's for you, it's very high price.
Quite frankly, we have demonstrated country after country after country that this is a strategy that eventually leads to more competition, and we are very happy to have that chance to exploit new competition, to then realign the prices to a good commercial level. So, it has to be country-by-country because it depends on physical constraints and also competitive behaviors that are different by country.
What I'm happy with today is that, I know that there was, two, three years ago – three, four years ago, skepticism about the ability to deliver this strategy. It's actually becoming real and the numbers show it.
So, we think that we have been successful without having to invest massive amounts. Now, an M&A opportunity arise, of course, we will look at it, because of course it's make versus buy, and we will look at what is the time and the return that we can expect from M&A.
On joint dominance, I spent a day in Brussels talking to all the kind of relevant proponents of it. I have to say they have concerns that I don't share, and most importantly, there needs to be a methodology to define what is the joint dominance risk.
It seems to me that today, the real problem in most places is to create competition to the usual formal monopolies we use (01:10:07) who controls the fiber. So, for me, the idea of creating joint dominance in the moment where Vodafone actually is bringing more competition to the system and Liberty also, to be fair, I think is – would be wrong.
So, our position is, wait, tell me which problem you're trying to solve. If there's no problem, just allow competition to flourish.
Yes, I don't remember who I said was the next. Robert (01:10:35) maybe.
Unknown Speaker
Yeah. A point of clarification first on the CityFibre question.
Do you have to book the liability to CityFibre on your balance sheet for that transaction? And my question (01:10:51) my question is about handset financing.
You mentioned that that is increasing. It's offset by better roaming, but that's increasing as an effect.
Is that a multi-market thing? Is that UK?
And what's driving that? Is it iPhone-related?
Is it people stopping moving to SIM-only, for example? Thanks.
Nicholas Jonathan Read - Vodafone Group Plc
So, fairly straightforward, in terms of CityFibre, it's a wholesale arrangement. So, there's a contractual obligation in terms of minimum commitment, but it's not like we are internalizing that CapEx.
It's a wholesale arrangement. I would say in terms of UK handset financing, it's building just through sheer volumes.
It's not to do with iPhone at all. If anything, when you look at iPhone volumes, this phase, I wouldn't call them particularly strong relative to previous cycles.
So, I would say this is more to do with demand in the marketplace. As Vittorio has said, the UK has been really improving performance.
It's commercially on the front foot. Therefore, volumes are rising.
Vittorio Amedeo Colao - Vodafone Group Plc
But let me take the broader side of your question, is handset financing and installments a good thing or a bad thing? And I do believe that it is intrinsically a good thing, because this makes customers think, do I need to change a phone, do I want to get the new iPhone X.
If they do, great. If they don't, what's the next best thing they can do, maybe I can increase my allowance, maybe I can put my dog and my car and my whatever on my plan, maybe I can get a higher, whatever, fiber broadband.
So, it separates more clearly a telecom broadband connection type of decision from a harder decision, and the beauty is that this is happening, not by coincidence, when we are investing in customer relationship with the CXX program, we're investing in network with the Spring program, and we're trying to digitize the experience as best as we can. This will have a positive impact on commissions, subsidies, and in general, commercial cost.
And it's starting to show. It will take time, but it's starting to show.
Yes, I think let's go there. Yeah, James (01:13:06)?
Unknown Speaker
Yes, thank you. (01:13:09) wider ranging question about Germany in general.
It looks like relative to expectations, that was one of the ones that beat expectations most significantly. It's your biggest market.
So, I was just wondering if you could talk a bit about how you see that market developing for you over the next 6 to 12 months. In the past, you've talked about indirect competition being aggressive.
Maybe you're suggesting that's now a little bit less so. What's happened with United Internet potentially migrating some of the MVNO away?
Are you picking up share from O2 Deutschland at the moment on contract adds? So, kind of a broader-reaching question on how you see Germany over the next 6 to 12 months, please.
Vittorio Amedeo Colao - Vodafone Group Plc
James (01:13:50), I'm optimistic on Germany. Otherwise, we wouldn't be putting €2 billion extra money in Germany.
I think Germany has a good market structure, and credit goes, if we are honest, to both us and Deutsche. There's two players who are doing fully integrated and in a wise way convergence.
We are serving customers – corporate customers in a, I would say, disciplined way, and we clearly are the quality providers of the market. I was comparing last night the pricing levels of Deutsche versus us.
We are a little bit cheaper on the service and they are a little bit cheaper on the handsets. So, it's hard to really say.
But we are clearly competing on quality. We are competing on innovation.
We are competing on branding. And we are, I think, competing as Vodafone well, as the numbers show.
Then, there is another part of the market which we tend to defend through second brands and other stuff, otelo and Congstar (01:14:51) and other stuff, which is more in the hands of other players. And my assessment is that wholesaling and MVNO-ing your own network in the long-term does not strengthen the operation.
We have to see what will happen in Italy, which is another market where the number three is playing the same game and the results don't seem to be particularly good. It doesn't surprise me, because when you give away too much your own infrastructure and your own service for a price which is not in line with the market, customers eventually switch.
So, convergence is intelligent. There are richer higher end bundles now include the Vodafone Pass, Deutsche includes the, what they call, the Binge On German thing, which is fine, because again it goes in the direction of creating a better experience and then you manage the cost implication of it.
And so, I am optimistic about the structure of the market, provided that both us and Deutsche continue to run – to be run in a disciplined way.
Nicholas Jonathan Read - Vodafone Group Plc
Yeah. I'd just say, just to build on that, the fixed in terms of the quality mix of the gross adds, in terms of higher speed 60% on the 2 megabits per second product and above is a good mix.
And Enterprise was historically very challenging, has improved, as a market environment (01:16:14).
Vittorio Amedeo Colao - Vodafone Group Plc
Andrew (01:16:16), then we come back here in the middle.
Unknown Speaker
Yeah. I just wondered if you could talk about how much of your digital cost savings you think you actually get to keep?
Are there markets in which everyone else is doing this and you think that the benefits is just going to be passed through to the customer in lower prices like we've seen in previous cost cutting examples, or is there a reason why Vodafone is going to be better able to deliver substantial cost savings than its peers in each market? And then just as an add-on question on that, what can the regulator do to get in the way of the returns enhancing moves you're making?
Vittorio Amedeo Colao - Vodafone Group Plc
Yeah. Let me take the first (01:16:59), but I give you the answer that I like to believe in, because I have to believe in that answer.
Digital cost savings come – I mean, there's a part that comes anyhow, but they don't come with very deep transformations and very radical changes of organizations and technology infrastructures. I like to believe that Vodafone will do it by and is doing it by contaminating in a much quicker and much deeper way each operating unit.
The examples I gave and, here, we have Johan, we are again seen by the partner markets that pay a fee for Vodafone to be part of the club as source of technology expertise. So, they ask me, (01:17:49), but they want to see a lot of Johan now because the introduction of digital layers, because Massive MIMO, because smart CapEx allocation is becoming the name of the game.
We have many, of course. We can learn from Italy, learn from UK, and very quickly put them, on the other day I was in Newbury, there was a Spanish team kind of learning.
And so, we can really do that probably quicker than others. It doesn't mean that we do it better than others.
So, hopefully, we'll also do it better, but quicker we should. Will this be competed away?
That is a revenue question. And my comment related to Germany, about Italy is we see number three players typically giving away more, but not necessarily getting much more in terms of financial performance, at least if I compare the recent announcement, I'm not really impressed by (01:18:38), which means that at some point there will be a squeeze on that.
Different story with the low-cost providers, very low-cost providers, the MÁSMÓVIL, (01:18:49) Italy. Those we need to counter in the market with very focused initiatives, because these guys will come unfortunately with good conditions that they got from the others.
And so, we will need to be very focused, which is why having agility, having the extra layer (01:19:03) is very important because we need to be able to roll out fast in every market to hammer the new entrants (01:19:09). But this flexibility is what I think will make us a little bit better.
The second part of your question?
Unknown Speaker
Just on – how can the regulator stop your gains? And just to your point...
Vittorio Amedeo Colao - Vodafone Group Plc
The regulators clearly are signaling that they don't like markets to go to three. They – as soon as they go to three, they recreate a four.
So, that to me is already the answer, the joint dominance is clearly a possible risk that we are signing off. But honestly, the rest which is left is international calls, which is not big for us at least, it's bigger for the fixed guys, for the traditional fixed guys.
There could be something on content renewals and these things, but there's not a huge amount left apart from spectrum, spectrum can be expensive, but. Yeah, David?
David Wright - Bank of America Merrill Lynch
Yes. David Wright from Bank of America.
One question, kind of spanning two markets, but it's essentially the JVs. You've increased the cash distribution or I should say the JV has in the Netherlands.
And that's come with a credit downgrade, I believe over the last 24 hours. It does feel like you're clearly then willing to run a higher gearing, but actually, I guess, my question is more about India.
Since you've announced the deal, you obviously announced the leverage on the full-year 2016 EBITDA, which clearly full-year 2017 is a very, very different level. So, we're talking 5 times cost leverage.
The MTR decision's arguably – the termination rate decisions, they've just probably gone against your expectations I would have thought. So, what I'm trying to understand is the need for more capital in that business, it feels like you're struggling a little bit on the CapEx side, Bharti is certainly attacking you, and that's a very essential cost of business in India.
So what's the potential for that JV needing more capital is ultimately my question.
Nicholas Jonathan Read - Vodafone Group Plc
Yeah. I mean, the answer is it's too early to say.
Because if you stand back, as Vittorio has said in his summary for India, I mean, Jio started charging at the start of the fiscal year, July, put prices up. September, put prices up.
Who knows what happens in the next quarter and the next quarter. So, they're putting prices up quite significantly, I mean, the last one at the half-year was 15%, 20%.
So, the material increase is going on. On top of that, we're definitely seeing traffic flow from the value players exiting the market to the other players and we're taking our reasonable share.
So, yes, I understand the MTRs is a drag in the second half, but we've got some fundamentals that are starting to improve. And if you cast your memory all the way back to when there was a 14-player price war going on seven-odd years ago, yes, it went down and then it came back very quickly as well with price increases.
So, I think, firstly, the market's showing some promise. So, I'd say, secondly, don't forget 80% of the share (01:22:06) is to the government for spectrum payment, of which they're already talking about rescheduling from 10 years to 16 years.
So, we'll have to see that re-profiling go on. We're working very hard on the towers.
So, I think we landed I think a good deal for us on the orphan towers. We're now working on the Indus options and we're progressing those.
So, I think the answer is, well, we've still got, who knows, anywhere between nine months, 12 months that we'll have to run to close out the deal, we're being very active and we're aware of needing to have the right capital structure when we go in. But there's a lot happening in the market as well.
Vittorio Amedeo Colao - Vodafone Group Plc
Yeah, I do remember...
Nicholas Jonathan Read - Vodafone Group Plc
Can I just – you mentioned Netherlands. I mean, and what is common to both of these is very sizable synergies.
So – and both of them have a lot of infrastructure. So, if you think about it, India has got its spectrum, big network; in Netherlands, we already had national cable build, national 4G.
So, a lot of the infrastructure's in the ground here, and therefore the synergies have a big leverage effect from both of these which allowed us to talk very highly leverage.
Vittorio Amedeo Colao - Vodafone Group Plc
So there – then Nick (01:23:20), you had a question? No?
Yes, and then Andrew and then we go back to Jerry (01:23:22)?
Unknown Speaker
Hi there. (01:23:28) from RBC.
A quick one on the scale of the UK in terms of CityFibre and that deal you just announced. Phase one of that is for 1 million homes passed, with phase two we have 5 million.
Is that an automatic flow through from phase one to phase two, or are there any certain conditions you need to meet to do that? And secondly, within that, obviously the size of that 5 million homes passed is determined by the sort of 42 cities that are currently in.
Would you have any aspiration to go beyond that, say, the top sort of 100 cities and much more 5 million homes, or is that dependent on Openreach's response?
Vittorio Amedeo Colao - Vodafone Group Plc
You have the answer. It's very difficult for us to say today where we want to go, because as I said, our strategy is a very iterative strategy.
You would develop an option, you exploit the option, you see whether you have an alternative and you keep going. So, we'll look at the first million, decision to go to 5 million will depend on how things go.
If Openreach insist in saying we need to raise wholesale prices because we need to invest, I think they're creating room in the market for CityFibre and for others, by the way, because the more they insist on that strategy, the more room there would be for other entrepreneurs to do like whatever. Deutsche Glasfaser in Germany or other initiatives of that kind.
If Openreach change, they change their stance and they change their conditions, then, of course, it will depend on the levels. So, it's difficult to answer that question.
In fixed unfortunately it's not like in mobile where you say, I do this and I will do it and in three years is done, you have to change along the way. Nick?
Nicholas Jonathan Read - Vodafone Group Plc
It's right. All the terms from the 1 million to the 5 million (01:25:16).
Vittorio Amedeo Colao - Vodafone Group Plc
Nick and Andrew (01:25:18) then, and then Jerry and then we come back.
Spyros Nicholas Delfas - Redburn (Europe) Ltd.
Yeah, thanks. Nick Delfas from Redburn.
It's another difficult-to-answer question which is about this issue of the lower-priced entities in each market. So, you've got quite a nice structural improvement here with the MNOs consolidating and many of the MVNOs being under pressure, but you still have the MÁSMÓVILs, the Iliads in Italy, the (01:25:43).
So, what I'm not quite clear on is how you strategize around how much oxygen to give those guys or to allow them, or put another way, how can you be confident that your customers on the main brand are actually a little bit sloppier than you might like. They might just actually take the price cut at some stage.
So, is there anything you can tell us about NPS, about how you strategize about that, because very often in telecoms, everything can look good until suddenly everyone starts to churn down to the lower price?
Vittorio Amedeo Colao - Vodafone Group Plc
I can tell you what we are doing in Spain or in Italy, which are the two markets where we have one live case and one to-be case. First of all, look at the market prices, I mean, if you look at the promotions that are available in Italy today, I mean, 20 gig €10, 32 gig €10, 30 gigs, I mean, it's already a market which is incredibly low in terms of opportunity.
So, there's – the real bottom end of the market is already kind of followed (01:26:52) in a very aggressive and very, I'd say, promotional way, which does not mean that nothing will happen there, but I'm not so sure how much oxygen is really left. What we do in the higher end of the market, again, through advanced IT systems, we analyze customers.
We analyze inclinations. We analyze the reason for growing.
And, for example, in Italy, we have covered already more than 1.5 million of – sorry, 1 million, not 1.5 million, we would be a 1.5 million by then – customers that – for analytical reasons we know that they have some pain points or some reasons potentially to go. And then we intervene and we change conditions to those.
But we change one by one by one. So, it's an incredibly sophisticated (01:27:37) you see all these maps and then you go down (01:27:41) get to Nick and say Nick means this.
So, you immunize the high-end by removing the higher end – by removing the pain points. You do more convergence, so you offer converge, we launched in Italy one converge product at I think relatively aggressive price because it's a good price with mobile and with a Vodafone Pass included.
Some of them you lock them in family, some of them you give them more, some of them you compete with (01:28:10). And then eventually you can also consider other brands or second brands or some brands, which again have to cost nothing.
And hence, again, the agility and the importance of having these engines. There's no single answer, I would say.
In Spain, Lowi is clearly going after MÁSMÓVIL, because we need to respond.
Spyros Nicholas Delfas - Redburn (Europe) Ltd.
(01:28:34) market share of SIMs or revenue that you want to maintain in each market, because, I guess, in Spain, maybe your market share – well, actually this quarter might be okay, but you've ceded some market share over the last couple of years in Spain I think.
Vittorio Amedeo Colao - Vodafone Group Plc
In Spain, we ceded some market share, us and Telefónica, to the second brand of Orange and MÁSMÓVIL. It's interesting that if you look at the first, the main brand of Orange, actually they're not doing particularly well.
This is the problem. When these guys start doing – enabling other guys, you suffer.
We are going into this more articulated set of responses everywhere. I don't have a target.
I think it's good to – I mean, you don't kill anybody in the business. You allow everybody to survive.
But it's good to leave as little oxygen as possible, so that eventually sanity has to come back into the market. Andrew, (01:29:30) Jerry, I think we have two more.
Can we get the microphone here to the right please or push the button and speak.
Unknown Speaker
Sorry. Just in terms of a longer-term question around 5G, and I guess that's now coming on to your investment horizon.
Is there an opportunity do you think to get ahead of the curve in 5G and perhaps do some things that either the wireline incumbent might not choose to do, or three or four might not be able to afford to do. Can you achieve some lasting differentiation that way?
And if so, can it be done within the existing CapEx envelope that you have?
Vittorio Amedeo Colao - Vodafone Group Plc
Listen, the 5G topic is a complicated one, because when people ask me this question, first of all, be assured that we talk to every single possible person everywhere in the planet who knows anything about it, whether this is Chinese people or manufacturers, or Americans, or whatever, Koreans, everybody who pretends to be ahead on 5G. Somebody in this room, (01:30:47) myself, Nick, we are in content with.
So, I think it's hard to see a single strategy to be first because you need to align spectrum, technology and devices. Probably the area where you will see earlier implementation of 5G will be IoT and maybe in the areas of smart cities, maybe in the areas of industrial IoT, depending on whom you talk to.
I don't think that for consumer normal use there will be a particular reason to really rush ahead, what you can do with 4.5G is very good. Now, that does not mean that, for example, in Milan, because of the tender conditions, we are not already experimenting, and I will probably say a few things more in Barcelona in February about it with very advanced solutions.
But I don't believe that other than segments or pieces of it, it's going to be really worth trying to be first in 2018 or 2019. Different thing to say how much of 5G we can use to reduce our cost, increase our capacity and go in the monetization, the right part of my chair, which Johan believes very strongly on and you can talk to Johan after, because that is a serious reduction of cost versus 4.5G.
But there's more capacity and cost really than – more than that. Augmented reality maybe, but how long will it take again?
So, I don't think that for consumer applications you are talking about much earlier than 2020, 2021.
Unknown Speaker
And just, I mean, is there anything on the preplanning side where it makes sense to do further densification or other activities – or are there other activities to do?
Vittorio Amedeo Colao - Vodafone Group Plc
No, it makes sense to – of course, it makes sense to have the network readiness, it makes sense to get transmission in the high capacity, high traffic side brought up to fiber. We have this target of 95%.
We are on the way there. It makes sense, of course, to prepare the platforms that will deliver the services, IoT in particular earlier, because in any case, we are – I mean, as we say, the reason why we launch consumer IoT in November 2017 is not really for what we are going to do in 2018 or 2019, but it is to prepare a strong platform for the next following 10 years.
So, all those things we're doing, so it's more platforms, it's more enablers, and then in the meantime, talk to whoever in the world is doing the different pieces so that we can apply the best one. And we might be first in one city or in one country, but I'm not sure I see a generalized consumer early adoption.
Jeremy Dellis - Jefferies International Ltd.
Okay. Good morning.
It's Jerry Dellis from Jefferies. I've got a question mainly on Italy, please.
In the context of the UK, you described how the joint venture with CityFibre is logical approach to keeping Openreach's feet to the fire in terms of their pricing strategy and their fiber ambition. And I wondered whether the Vodafone strategy on Italian fiber is similarly open-minded as you think about the potential sources of supply going forward, be it Telecom Italia or Enel.
And then within the Enel coverage area currently, which is, I suppose, no longer particularly trivial, are you actively switching existing Vodafone fixed broadband customers across from indirect wholesale access from Telecom Italia onto the new Enel network. Are there any practical economic constraints to switching customers over quickly?
Vittorio Amedeo Colao - Vodafone Group Plc
Let me start from the end of your question, the answer to your question is yes, we're switching customers, and no, there's no constraints. Actually it's an obligation, contractual obligation that we have with them.
And so, whenever the lines are made available to us, we see who is there and we switch. And then going back, the answer to the question is, yes, I mean, we don't have any ideological resistance to working with any incumbent.
And sometimes, if they give us good conditions and they work in a transparent and completely neutral way, we're very happy to work with them. The problem is that most of them, they get there only when there is a real threat.
And now, there is a real threat everywhere. So, if I were the parliament or the commission, I would celebrate (01:35:31) Vodafone, because thanks to (01:35:33) Vodafone, there is competition in Italy, in Germany, in Spain, in the UK now, in Portugal, in Greece, in Ireland and on and on and on.
So, it is not an ideological thing, we just want to get good conditions and good prices. So, happy to consider.
Do we have one more, or we close it here? We close it here?
Vittorio Amedeo Colao - Vodafone Group Plc
I would like to thank you very much. I would like to reiterate, good half, very solid strategic process and increased guidance to reflect all of that.
But most importantly, the future is exciting really.