Vodafone Group 20-F 2006
Documents found in this filing:
AND EXCHANGE COMMISSION
Commission file number: 1-10086
GROUP PUBLIC LIMITED COMPANY
Vodafone House, The Connection,
Newbury, Berkshire RG14 2FN, England
Securities registered or to be registered pursuant to Section 12(b) of the Act:
The selected financial data set out on the following pages is derived from the Consolidated Financial Statements of the Company on pages 71 to 130 and as such should be read in conjunction with them. Certain trends within the financial data presented below have been impacted by business acquisitions and disposals, the most significant of which are described in Business Overview History and Development of the Company.
The Consolidated Financial Statements are prepared in accordance with IFRS, on the basis set out in note 1 to the Consolidated Financial Statements, which differ in certain significant respects from US GAAP. For further details, see note 38 to the Consolidated Financial Statements, US GAAP information. Solely for convenience, amounts represented below in dollars have been translated at $1.7393: £1, the Noon Buying Rate on 31 March 2006.
Group at a Glance
Vodafone is the worlds leading mobile
has been my privilege
My last year as Chairman of Vodafone has been a watershed in the history of your Company. We have been undergoing significant change whilst operating in the most challenging market environment the telecommunications sector has seen. Nevertheless, our ability to deliver good growth in the face of increasing competition reflects the unique characteristics of our business, compared to many other mobile operators, particularly the benefits derived from our increasing exposure to faster-growing markets and the opportunity to generate further benefits from our scale.
We maintained strong customer growth across many of our markets and grew our proportionate mobile customer base to over 170 million, representing organic growth of 15% since last year. Importantly, we achieved our 10 million 3G target, which included Japan, during March, which was ahead of plan.
Over the year, we have announced total returns to shareholders of £19.2 billion. We have purchased over 4.8 billion shares in the Company at a cost of £6.5 billion and are paying out £3.7 billion in dividends for the year, including the proposed final dividend of 3.87 pence per share. We are also returning £9.0 billion to shareholders, including £6.0 billion following the sale of our Japanese business. Full details are in the documentation accompanying this Report.
When I became Chairman in July 1998 we had fewer than 6 million customers in 12 countries producing some £2.5 billion of turnover. In the summer of 1999, we acquired AirTouch of the US, followed in 2000 by the acquisition of Mannesmann in Germany. This was a period of huge expansion which formed the basis of the transformation of Vodafone into the worlds leading mobile telecommunications group that has equity interests in 26 countries across five continents with over 170 million proportionate customers worldwide, as well as 32 partner networks, generating turnover this year from our ongoing businesses of over £29 billion. Not only have we extended our geographic reach but we have also transformed our industry by becoming a leader in innovation, introducing groundbreaking services such as Vodafone live! with 3G, thereby setting standards for the mobile industry as a whole. It has been a remarkable achievement.
However, the Group now faces many challenges, particularly of competition, regulation and new technology. During the year, we conducted, in the face of these challenges, a review of the future growth prospects for the Group and our analysis indicated a lower view of growth, particularly in the medium to long term, and led to an impairment of the Groups goodwill by £23.5 billion, the majority of which is attributable to Vodafone Germany. This charge does not impact this years reported cash flows or distributable reserves, out of which we are making returns to shareholders.
However, in this challenging market the Chief Executive has spent a great deal of time reviewing the management structure and future planning required to take the Company forward. In April he announced his new management team and in May they produced a clear forward-looking strategy. I believe that through this statement the Chief Executive sets out a clear vision for the future. I congratulate him on these changes and wish him and his impressive team well.
It has been my privilege to be the Chairman of a company that has proved to be one of the outstanding international success stories of the last decade. The development and expansion of the Group has been made possible by the excellence of the management team whose flair and vision has enabled us to identify international opportunities for profitable growth while at the same time introducing technological advances to enhance the mobile experience for our customers.
It was announced earlier this year that Sir Julian Horn-Smith had decided to retire from the Board following the Annual General Meeting in July. Julian has been with Vodafone for 22 years and a Board member for 10 years. He has had an outstanding career, being a major contributor to the creation of the UK network and subsequently leading the early development of our international presence. More recently he was Group Chief Operating Officer and then Deputy Chief Executive, with responsibility for our affiliates and business development. I am sure all shareholders will join with me in wishing him well for the future.
Peter Bamford, Chief Marketing Officer, who left the Company in early April, was instrumental in developing our brand both within the UK and internationally and developing a number of major initiatives, including the launch of Vodafone live! with 3G. I wish him well and thank him for his contribution to the success of the Company.
At the AGM, we say farewell to Paul Hazen, our Deputy Chairman, who has served with distinction as a non-executive director since 1999. We also say goodbye to Penny Hughes, a fine non-executive director for eight years and who was an exceptional Remuneration Committee Chair for five years. Her contribution cannot be overstated. Paul and Penny leave with our best wishes. Taking Pauls place as Deputy Chairman and senior independent director will be John Buchanan, who has been a non-executive director since April 2003, shortly after his retirement from BP p.l.c. I am sure that John will discharge his new duties very effectively.
During the year, we welcomed two new non-executive directors to the Board. In September, Philip Yea, Chief Executive Officer of 3i Group plc, was appointed and he was joined in November by Anne Lauvergeon, the Chairman of the Executive Board of AREVA, the leading French energy company. On 1 May, we welcomed Anthony Watson to the Board. Until his recent retirement, he was Chief Executive of Hermes Pensions Management Limited. I know that their collective experience in their different areas of business will be of great benefit to the Company.
Finally I come to my own retirement. As I have said, it has been a great privilege for me to have been Chairman of a truly outstanding British company. I have, however, been particularly saddened this year by the nature of some of the media coverage and particularly by the suggestion of boardroom splits. There are no factions within the Board and any claim that your Board is not united is unfounded. I leave with the knowledge that Vodafone, which is now very different to the company which I first chaired, is well placed to continue to enjoy an exciting and profitable future. I wish Sir John Bond, my successor, Arun Sarin, your Chief Executive, and everyone at Vodafone the very best for the future and thank you all for your support during the last eight years as your Chairman.
Chief Executives Review
We delivered another set
Review of the year
Proportionate customer growth was strong with nearly 22 million organic net additions in the year taking the closing proportionate customer base to over 170 million across 26 countries. Our unrivalled presence provides the platform for the next stage of our strategy.
These results have enabled us to significantly increase returns to shareholders. We have increased dividends per share by 49% to 6.07 pence, purchased £6.5 billion of our shares and announced a special distribution of £9.0 billion.
Our focus on profitability delivered an 11% organic increase in adjusted operating profit, with 13% growth in total. The competitive environment led to a necessary increase in net customer acquisition and retention costs but this was mitigated by our ongoing success in delivering operating efficiencies. A key part of this growth has been the strong overall performance from our associates, increasing by over 20% this year, and in particular from Verizon Wireless in the US, growing by nearly 28% as it consolidated its market leadership.
Capital expenditure on fixed assets was £4.0 billion as we continue to invest in broadening our 3G presence. Free cash flow of £6.4 billion was slightly lower than last year as expected, with increases in capital expenditure and lower dividends from Verizon Wireless offsetting an increase of £1.0 billion in net cash flow from operating activities.
A core part of delighting our customers is our 3G offering. When we launched 3G late in 2004, we targeted 10 million consumers by the end of March 2006, including Japan. We reached this during March, shortly before we agreed to sell our Japanese operation.
3G brings an enhanced mobile experience to our customers, who want more speed, greater personalisation and richer content, and provides the platform for our future growth. For consumers, we launched mobile TV capability during the year and will further enhance our music offering during 2006 with the launch of Vodafone Radio DJ, a personalised, interactive radio service streamed to both 3G phones and PCs.
For our business customers, we increased the number of mobile email solutions and range of email devices available. 3G broadband through HSDPA technology was launched in the year offering an enhanced data experience through greater speeds than 3G and faster access to the network. This will improve our already successful Vodafone Mobile Connect offering for laptop users, who have more choice with mobile capability now being built in to the laptop.
Another key part of delighting our customers is measuring customer satisfaction and brand preference. With rising customer expectations and a tougher competitive environment, we are pleased that we continue to outperform our principal competitors in terms of customer satisfaction and that customers continue to show preference for the Vodafone brand.
The second strategic area of focus has been leveraging our scale and scope which delivers benefits through our One Vodafone programme, details of which we set out last year.
We are beginning to deliver real benefits in network supply chain management, as standardised designs lead to a reduced number of vendors and better terms. Our shared service platforms, which centrally host services such as Vodafone live!, are also now established.
Our strategic goals are ultimately designed to deliver shareholder value. With respect to Japan, given the relative competitive position of the business there, the reduced prospects for superior long term returns and an attractive offer from SoftBank, we decided to sell our 97.7% stake based on a value for the business of £8.9 billion. The sale completed in April, with Vodafone receiving £6.9 billion in cash, £6.0 billion of which we are returning to shareholders as part of the £9.0 billion special distribution.
Rapidly changing environment
There are several key drivers to the changing environment. Competition is increasing not only from established mobile operators but also from new entrants, particularly mobile virtual network operators (MVNOs). There are also new types of competitor. Established fixed line operators are increasingly combining fixed and mobile service offerings. In addition, internet based companies are extending their services to include telecommunications. All of these factors are putting pressure on pricing.
The regulatory environment also remains challenging, with continued regulator-imposed rate reductions on incoming calls across many markets, ongoing pressure to provide access to MVNOs to our networks and a high level of focus on the costs of roaming.
Developments in technology also mean that our customers have far more choice and have changing communication needs, but at the same time they demand simplicity and value for money. In addition to the core benefits of mobility, customers want greater personalisation, faster data speed and richer applications through services centred on the home and the office.
Finally, our growth historically has principally come from developed markets, particularly in Europe. With average penetration now around 100%, these markets are maturing and delivering lower growth. Whilst growth in these markets has slowed, significant growth is now coming from emerging markets where average penetration is below 30%. This is creating greater diversity between our markets than previously. Transactions over the last year in Turkey, South Africa, India and Romania have combined with existing operations in markets such as Egypt to provide us now with greater exposure to this growth potential.
Developing our strategy
In order to deliver on these objectives, we have reorganised ourselves into three key business units.
In our European businesses, where competition is most intense, we will be focused on leveraging our regional scale to deliver cost reduction and revenue stimulation.
The principal focus in the Eastern Europe, Middle East, Africa, Asia Pacific and Affiliates (EMAPA) region is to deliver strong growth from our businesses in emerging markets.
The new objective of our third business unit, New Businesses, is to enable us to serve the total communications needs of our customers by taking advantage of evolving technology and new opportunities to deliver new services.
We will outsource further, particularly for IT development of billing and customer management systems, as a key means to reduce our costs. We will also continue to drive scale benefits, either at a global level, in areas such as network supply chain management as we achieve greater standardisation across the Group, or regionally, such as through the establishment of regional data centres to support our European operations. As the size of the Group evolves, we need to ensure the appropriate balance between local and group, particularly in respect of central functions, and this is expected to result in over 400 fewer group positions.
For our consumers, we will seek to enhance revenues by continuing to deliver innovative bundles and tariffs to stimulate usage, building on success in areas such as 3G bundles, targeted promotions, family plans that focus on community groups and roaming through Vodafone Passport.
We are already targeting fixed to mobile substitution in the home through offerings such as Vodafone Zuhause in Germany and Vodafone Casa in Italy and aim to target office communications by building on our success in business with leading edge services, such as Oficina Vodafone in Spain, and applications through the benefits of broadband.
Deliver strong growth
in emerging markets
We will seek selective opportunities to increase our emerging markets footprint as well as taking opportunities to increase our stakes in existing markets, with a view to gaining control where possible over time.
Delivering our customers total
We will extend our reach into the home and the office to deliver richer business applications and integrated fixed and mobile services, such as higher speed internet access. We will use technologies such as HSDPA, DSL and WiFi to do this. Later this year, we will be enhancing our Vodafone Zuhause offering to incorporate DSL.
Developments in technology will also enable us to provide integrated mobile and PC offerings to give customers a consistent experience whether they are at home or on the move, with core services such as VOIP and instant messaging. We also aim to extend our business model to generate revenue from advertising in ways that customers find attractive.
We will continue to pursue a mobile centric approach, focusing on the core benefits to customers of mobility and personalisation, and will resell fixed line technologies only according to customer needs.
Actively managing our portfolio
There has been much speculation about our position in the US. Verizon Wireless is the market leader on nearly all key metrics and has significant local and regional scale, with over 50 million customers. We will always consider the most appropriate way to deliver shareholder value. However, we expect continued strong growth in the US and are therefore happy to remain with our existing stake.
On the same basis, we continue to target expenditures on fixed assets to be 10% of revenue for the 2008 financial year. We also continue to expect at least 1% additional revenue market share between the 2005 and 2008 financial years, measured against our established principal competitors in Germany, Italy, Spain and the UK.
Our strategic changes also have implications on returns to shareholders and our capital structure. We have previously indicated an intention to pay out approximately 50% of adjusted earnings per share for the 2007 financial year onwards. We now consider it appropriate to target a 60% payout ratio, with effect for the full 2006 financial year, with a view to growing the dividend per share in line with underlying earnings per share thereafter. Dividends per share have, therefore, increased by 49% to 6.07 pence for the year.
As we enter a new phase in our development, we believe that the most appropriate capital structure, which meets the needs of both the business and shareholders, is one that reflects a higher level of gearing. The incremental borrowing capacity this provides enables an additional return of £3.0 billion to shareholders, which will be combined with the £6.0 billion return of cash from the sale of Japan in early August. As a result, we do not currently plan any further share purchases or other one-off returns to shareholders.
This £9.0 billion one-off return, together with the £6.5 billion share purchase programme completed during the last year and £3.7 billion of dividends, gives an overall return to shareholders of £19.2 billion.
for the year ahead
For the year ahead, we expect operating conditions to remain challenging, with a continued intense competitive environment and further regulatory pressure, but nevertheless see continued growth in Group revenue. We are anticipating higher customer investment, pricing pressures and further termination rate reductions to impact growth in adjusted operating profit, however initiatives to deliver further cost efficiencies are expected to mitigate this effect.
Capital expenditure on fixed assets is expected to be in the range of £4.2 billion to £4.6 billion, higher than last year due to the investment needs for recent acquisitions and the wider rollout of HSDPA. Free cash flow is anticipated to be in the range of £4.0 billion to £4.5 billion. Higher tax payments, including around £1.2 billion, with interest costs, from settling some long standing disputes, increased capital expenditure and higher financing costs from our increased borrowing, are expected to offset continued growth in underlying operating cash flows.
Executing our strategy
We have established clear strategic objectives: cost reduction and revenue stimulation in Europe; innovating and delivering total communications solutions; delivering strong growth in emerging markets; actively managing our portfolio to maximise returns; and aligning our financial policies to our strategy. We have reorganised the business as we begin to deliver against these objectives.
Vodafone is well placed to execute on this strategy. Our scale makes us the clear partner of choice for others and we have a track record for innovation. We have a strong brand and an unrivalled customer reach. As customer demands evolve and technology converges, we remain focused on the core benefits of mobility and personalisation as we seek to deliver total communications solutions. We have a significant opportunity to deliver value to both our customers and shareholders.
On a final note, on behalf of the Board, I would like to express sincere thanks to Ian MacLaurin, who is retiring as Chairman, for his service and support to the Company since 1997. We wish him continued success.
The Groups mobile subsidiaries and joint venture in Italy operate under the brand name Vodafone. In the United States, the Groups associated undertaking operates as Verizon Wireless. During the last two financial years, the Group has also entered into arrangements with a number of its associated undertakings and with network operators in countries where the Group does not hold an equity stake. Under the terms of these Partner Market agreements, the Group and its Partner Markets co-operate in the development and marketing of certain services, often under dual brand logos. This has expanded the Groups global footprint in Europe, Asia Pacific and, most recently, South America.
The Group provides a wide range of voice and data mobile telecommunications services, including text messages (SMS), picture messages (MMS) and other data services, and is continually developing and enhancing service offerings, particularly through third generation (3G) mobile technology which is being deployed in the majority of the Groups operations. Services are provided to both consumers and corporate customers, through a variety of both prepaid and contract tariff arrangements.
The Groups mobile services are currently offered over a Global System for Mobile Communications (GSM) network, on which a General Packet Radio Service (GPRS) service is also provided and, in certain operations, over a Wideband Code Division Multiple Access (W-CDMA) 3G network. The Groups discontinued operation in Japan operated a different technology to GSM. Where licences have been issued, the Group has secured 3G licences in all jurisdictions in which it operates through its subsidiary undertakings and continues to roll out mobile 3G network infrastructure. Vodafone offered 3G services in 11 of its controlled operations at 31 March 2006.
The Group is managed and organised by business and geography. The Group has mobile and fixed line telecommunications businesses, with the latter referred to as Other Operations. Vodafones principal mobile operations are located in Germany, Italy, Spain, the UK and the US with the Groups Other Mobile Operations covering operations in Europe, the Middle East, Africa and Asia Pacific. In addition, there are a number of central functions which provide services to the mobile operations and allow the Group to leverage its scale and scope and manage risk effectively. Other Operations principally consists of the Groups controlling interest in a fixed line telecommunications business in Germany. On 1 May 2006, changes to the organisational structure were effected with the objective of focusing the Groups mobile businesses according to different market and customer requirements.
The Companys ordinary shares are listed on the London Stock Exchange and the Companys ADSs are listed on the New York Stock Exchange (NYSE). The Company had a total market capitalisation of approximately £72 billion at 26 May 2006, making it the fifth largest company in the Financial Times Stock Exchange 100 index and the twenty second largest company in the world based on market capitalisation at that date.
At 31 March 2006, based on the registered customers of mobile telecommunications ventures in which it had equity interests at that date, the Group had approximately 170.6 million customers, calculated on a proportionate basis in accordance with the Groups percentage interest in these ventures, and 518.0 million registered venture customers. The table on the following page sets out a summary of the Companys worldwide mobile operations at 31 March 2006 and venture customer growth in the year then ended (the 2006 financial year).
The Group expects that competition will continue from existing operators as well as from a number of new market entrants, including those arising following the award of new 3G licences and MVNOs. The scope of this increased competition, and the impact on the results of operations, is discussed further in Performance Risk Factors, Trends and Outlook.
Many of Vodafones key markets are highly penetrated with over 100% penetration rates in some, largely due to a number of customers owning more than one subscriber identity module (SIM), which is, broadly, the Groups basis for defining a customer. The Group has estimated penetration rates at 31 December 2005 for its principal markets as follows:
A summary of the significant mobile competitors in its markets at 31 March 2006 is also provided in the following table.
Summary of Group mobile telecommunications businesses at 31 March 2006(1)
Similar agreements also exist with a number of the Groups associated undertakings.
Details of the partnership agreements in place as at 31 March 2006 are provided on the Groups website.
Licences and network infrastructure
Mobile network infrastructure
When a voice call or data transmission is made on a mobile device, voice or data is sent from the device and transmitted by low powered radio signals to the nearest base station, which in turn is connected to the Groups network. Each base station provides coverage over a given geographic area, often referred to as a cell. Cells can be as small as an individual building or as large as 20 miles across. Each cell is equipped with its own radio transmitter and receiver antenna. This network of cells provides, within certain limitations, coverage over the service area. When a customer using a mobile device approaches the boundary of one cell, the mobile network senses that the signal is becoming weak and automatically hands over the call to the transmission unit in the next cell into which the device is moving.
If the voice call or data transmission is intended for delivery to another device which is not on the Vodafone network, the information is delivered through a public or private fixed line telephone network or the internet.
In a second generation (2G) network, each cell contains a base station using a number of radio frequencies or channels. A group of base stations is connected to a base station controller, which in turn is connected to a mobile switching centre and then via a gateway support node for access to a fixed line network or the internet.
In a 3G network, voice or data traffic is passed through a node B, being similar to a base station in a 2G network, to a radio network controller, which is then connected to a mobile switching centre, similar to a 2G network.
Base stations and node Bs form a core element of a mobile network and an insufficient number of base stations can result in loss of service for customers. In addition, the correct deployment of the right base stations is instrumental in achieving the network quality and coverage that are crucial to customer satisfaction.
The GPRS data service offering includes internet and e-mail access allowing the customer to be always connected at download speeds slightly below a dial-up modem. Vodafone also offers a great variety of services on its Vodafone live! portal, such as picture and video messaging, download of ringtones, news and many other services.
The Group has secured 3G licences in all jurisdictions in which it operates through its subsidiary undertakings and in which such licences have been awarded to date, as well as in Italy through its joint venture. Vodafone expects to participate in additional 3G licence allocation procedures in other jurisdictions in which it operates. No assurances can be given that the Group will be successful in obtaining any 3G licences for which it intends to apply or bid.
Roll out of the 3G network infrastructure has continued throughout the 2006 financial year across the Groups mobile operations, with additions to property, plant and equipment and computer software amounting to approximately £4.0 billion during the financial year, including approximately £1.1 billion expenditure on 3G network infrastructure. By the end of March 2006, over 33,000 node Bs were in operation in the Groups controlled operations and the Groups joint venture in Italy. In many of the Groups markets, Vodafone has achieved the leading position on 3G coverage and quality of service.
Speed Downlink Packet Access (HSDPA)
HSDPA enables data transmission speeds of up to two megabits per second (Mbps) in the first phase, with up to 14.4 Mbps achievable with later releases. This will provide customers with faster access speeds than experienced on existing 3G networks.
HSDPA is enabled through the deployment of new software in the 3G radio network and expanding the processing capabilities of the node B. Significant performance benefits are achieved by using mechanisms that use the radio interface more effectively and are further adapted to bursty packet based data traffic using IP. A Vodafone Mobile Connect data card which supports HSDPA is available commercially, and compatible Vodafone live! handsets will be launched in the summer of 2006.
HSDPA has been launched commercially by a number of the Groups mobile operations, including Germany and Portugal, and will be launched by other operating companies in the Group during the 2007 financial year.
While HSDPA focuses on downlink (network to mobile), Vodafone is also working on improving the data speeds in the uplink (mobile to network) to achieve speeds of up to 384kbps.
As GSCM has expanded its scope of activities, Vodafone has seen significant progress in reducing per unit capital and operational expenditures, by leveraging the Groups scale.
GSCM works with more than 250 strategic suppliers. A consistent supplier performance management process has been implemented across the Groups mobile operations and Vodafone is actively managing a growing number of key suppliers in this way. Key suppliers are evaluated across six areas, covering aspects of financial stability, technological and commercial criteria, delivery and quality management requirements and corporate responsibility. This process is also being applied to consider relationships with new suppliers, and recently several Chinese suppliers have been qualified for business through GSCMs China Sourcing Initiative.
GSCM also strives to identify best practice across the Groups mobile operations with the aim of harmonising business processes, which will bring the benefits of further reducing procurement costs and reducing time to market.
Global suppliers are required to comply with the Groups Code of Ethical Purchasing which sets out the labour and environmental standards the Group expects suppliers to meet. The Code is based on the Groups values and international standards, including the Universal Declaration of Human Rights and the International Labour Organisation Conventions on Labour Standards.
A business-to-business electronic commerce strategy is currently being implemented to further increase transparency and control. In the 2006 financial year, purchases of more than £0.8 billion have been effected through e-auctions, driving significant cost savings.
More recently, a global demand management application has been implemented as part of the One Vodafone programme. This web-based application has been developed to provide improved co-ordination of the global purchase of handsets, providing benefits such as the reduction of inventory and obsolescence risk, improved availability and improved effectiveness to allow the Group to respond better to market changes.
It is the Groups policy to agree terms of transactions, including payment terms, with suppliers and it is the Groups normal practice that payment is made accordingly. The number of days outstanding between receipt of invoices and date of payment, calculated by reference to the amount owed to suppliers at the year end as a proportion of the amounts invoiced by suppliers during the year, was 36 days (2005: 35 days) in aggregate for the Group.
Products and services
Value for money is an important factor for customers when choosing a mobile phone network and is also important in encouraging usage of services whilst maximising revenue and margins. Two main charging or payment models exist in the mobile market contract and prepaid. Contract customers are usually governed by a written contract and credit facilities are granted to them to enable access to mobile network services. In most cases, contracts have a term of 12 to 24 months with monthly payments for services and, in many of the Groups mobile operations, the option of purchasing a subsidised handset. A prepaid customer pays in advance in order to gain access to voice and other services. The take-up of these models in the markets in which the Group operates varies significantly, from the US, where the vast majority of customers are on contract plans, to Italy and Egypt, where the market is predominantly prepaid.
The Group has made pricing more customer friendly and value inclusive in a number of its mobile operations. In many cases, these new price structures include large minute bundles that allow customers to talk more for longer. These larger bundle packages and promotions have driven significant usage growth in many of the markets in which the Group operates, although the price per minute is falling across most markets.
Revenue is generated by incoming as well as outgoing calls. Interconnect revenue is received when a customer of a fixed line or other mobile operator network calls a Vodafone customer. Approximately a fifth of mobile voice revenue is derived from incoming calls.
The Group continues to invest in providing enhanced network coverage for services in response to Group-wide customer feedback. In parallel, the Group is improving network service quality to ensure that customers can use their mobile phone whenever and wherever they want.
A new Social Investment Fund has been formed to provide incremental resources going forward and to seed initiatives that can demonstrate high social value. One of the initiatives likely to benefit from this is M-pesa, an innovative mobile micro-finance service now on trial in Kenya. This service, run in conjunction with a local bank and Vodafones Kenyan joint venture, Safaricom, enables customers to move money in and out of accounts, between other customers and to withdraw cash, all using secure mobile messaging.
Vodafones mobile instant messaging service (Vodafone Messenger) was re-launched during November 2005 in Italy, Spain and the Netherlands and is currently available in 11 countries. The service has full compatibility with Microsofts MSN Messenger in order to address growing customer needs for instant communications.
Vodafone has continued to develop the Vodafone live! proposition by offering a new range of services, content, handsets and tariffs. The design of the Vodafone live! portal, through which customers can access a range of online services including games, ringtones, news, sports and information is being continually enhanced to provide richer content and to make it easier for customers to find and purchase content.
The important ringtones market has continued to develop with mass market adoption of real-tones where customers are able to purchase samples of real music recordings as ringtones from artists signed to labels including EMI, Sony BMG Music Entertainment, Universal Music and Warner Music.
Tariff structures have been updated, with a range of messaging and content based bundles now available to customers. These have delivered improved customer value, particularly when offered in conjunction with a handset purchase. In addition, browsing charges for accessing the mobile internet have been simplified in many markets, making it more attractive for customers to browse the web using their mobile phones.
23 new 2.5G phones have been added to the Vodafone live! portfolio in the 2006 financial year, with an increased emphasis on exclusive and customised devices. The new handsets have offered improved camera capabilities, better connectivity, with a significant proportion of devices now offering Bluetooth (a wireless link function), and increased memory card storage to enable customers to save content on their devices.
Throughout the 2006 financial year, Vodafone has continued to develop standards in the areas of terminals, platforms, games, digital rights management and MMS. These initiatives are expected to lead to increased speed to market and better services for customers.
Vodafone live! with 3G
An enhanced mobile experience gives Vodafone live! with 3G customers access to a range of high quality content and communication services. Vodafone live! with 3G customers can now experience news broadcasts, sports highlights, music videos, movie trailers and other video content at a quality approaching that of digital television.Vodafone continues to work with leading content partners, including HBO, Eurosport, MTV, UEFA Champions League, Fox and Discovery, to enhance the mobile TV and film content offering. The wide bandwidth of 3G supports access to sophisticated 3D games and the portfolio of mobile games is continually expanding.
The 3G service also supports full track music downloads which allow customers to use their phone to listen to music, choosing from a range that currently includes more than 600,000 music tracks. Vodafone has secured music from some of the worlds greatest artists through agreements with EMI, Sony BMG Music Entertainment, Universal Music, Warner Music and other independent record labels. Using the 3G service, customers can also download live performance videos and stream clips direct to their mobiles.
In the coming year, Vodafone will continue to enhance the music offering with the introduction of Vodafone Radio DJ, a personalised, interactive radio service streamed to both 3G phones and PCs. Customers will have access to hundreds of thousands of tracks and will be able to personalise radio channels to their taste. This service will be offered on a monthly subscription, giving unlimited listening time, and is due for release in more than 20 countries over the next year.
In February 2006, a deal was signed with Google giving Vodafone customers access to the Google search engine via the Vodafone live! portal. The addition of the Google search engine (to be available from October 2006) will help customers access content more easily both on-portal and on the wider mobile internet. The agreement also sees the introduction of a new advertising based revenue stream to Vodafone live! by incorporating relevant sponsored links within customer search results. The partnership provides a future framework for other innovative collaborations between Vodafone and Google, bringing new opportunities to further expand consumer offerings by incorporating other existing Google products.
As new media channels evolve, a number of Vodafone initiatives are designed to ensure protection for our customers from inappropriate content, contact and commercialism. These include providing supporting guidelines around the marketing of content to customers, signing up to the codes of practice on spam content and the development of editorial guidelines to provide more robust parental controls.
Vodafone Mobile Connect data cards
The Vodafone Mobile Connect 3G/GPRS data card has now been rolled out across 11 controlled markets, two joint venture markets, three associated companies markets and ten Partner Markets. Vodafone Mobile Connect data cards are available in an increasing number of distribution channels.
During the 2006 financial year, Vodafone announced the launch of built-in 3G broadband connectivity with Acer, Dell and Lenovo notebooks. The roll out of the notebooks will further enhance the choices available to Vodafone customers for high speed mobile working.
The product portfolio was enhanced during the financial year with the launch of an EV-DO data card allowing customers to connect with Verizon Wireless high speed data network whilst travelling in the US. In addition, Vodafone also launched a 3G router in conjunction with Cisco and Linksys, which enables mobile connectivity for groups of employees.
At 31 March 2006, there were 0.7 million registered Vodafone Mobile Connect data cards in the Groups controlled and jointly controlled markets.
Vodafone Wireless Office
At 31 March 2006, Vodafone Wireless Office was available in 14 markets and had over 1.5 million customers.
Other business services
There were 0.4 million BlackBerry from Vodafone customers on the Groups controlled and jointly controlled networks as at 31 March 2006.
On 21 April 2005, the Group announced the roll out of Vodafone Push email, a service providing real-time, secure and remote access to email, contacts and calendar direct to a range of business-focused mobile devices. The service has been rolled out in six controlled markets, one joint venture market, two associated company markets and two Partner Markets. At 31 March 2006, the service was supported by ten global devices and a varied number of local devices in the controlled markets.
On 8 May 2006, the Group announced that average European roaming costs for Vodafone customers will be cut by at least 40% by April 2007, when compared to the period from June to August 2005. This is expected to benefit over 30 million Vodafone customers who roam every year, and will see the average cost of roaming in Europe fall from over 90 eurocents per minute to less than 55 eurocents per minute. The average
saving was determined by calculating the expected cost per minute for all Vodafones European customers who roam within the EU during the month of April 2007 and comparing this to the average cost per minute for all European customers who roamed within the EU during the period from June to August 2005 (see Regulation).
Vodafone also announced that it will enter into reciprocal wholesale arrangements with any other European operator at no more than 45 eurocents per minute for voice calls within the EU from October 2006. This will enable both Vodafone and other European mobile operators to continue to lower the cost of roaming to customers outside of their own networks.
Vodafone Passport is now available in 10 controlled markets, one joint venture market, one associated company market and one Partner Market. By 31 March 2006, the service had attracted 5.6 million customers in the Groups controlled and jointly controlled operations and a further 0.4 million customers in one of the Groups associated undertakings and a Partner Market. Results show that on average, customers are both talking more and paying less per call when abroad. In addition, Vodafones cost per minute for roaming customers fell by over 30% from summer 2004 compared with summer 2005.
Managed roaming, the network technology that automatically directs Vodafone customers to the networks of Partner Markets, is now operating in ten markets, delivering a strong Vodafone customer experience and allowing the Group to benefit from an improved cost structure.
In addition, after pioneering flat monthly data roaming tariffs with its BlackBerry from Vodafone offer in 2004, Vodafone launched a monthly bundle for its Vodafone Mobile Connect 3G/GPRS data card in August 2005, which eliminated price uncertainty and further reduced the nominal cost per megabyte by over 80%. This has significantly increased usage and contributed to the revenue growth in data services seen over the 2006 financial year.
At 31 March 2006, Vodafone Simply was available in a total of 17 markets, with 0.4 million Vodafone Simply enabled devices registered on the Groups controlled and jointly controlled networks.
Marketing and brand
Customer strategy and management
Products and services are available directly to both consumer and business customers in the majority of markets. Over 1,000 stores are directly owned and managed by Vodafone, with an additional 6,500 Vodafone branded stores. In addition, local websites offer products and services online and local sales forces are in place to discuss terms with business customers.
The extent of indirect distribution varies between markets but may include using third party service providers, independent dealers, agencies and mass marketing. Marketing to third party service providers includes maintaining a competitive tariff structure, providing technical and other training to their staff and providing financial incentives for service providers, their dealers and sales people. It also entails providing assistance on advertising campaigns and supporting the development of both specialist retail outlets and programmes with multiple retailers.
Vodafones engagement with IT resellers and distributors has strengthened during the year, with global and local partnerships now fully operational in 12 countries across the Vodafone footprint. In support of this channel capability, Vodafone has launched a channel marketing programme to engage with the IT reseller community via the internet. The programme allows Vodafone marketing and communication access to the IT channel and incentivisation for the sale of Vodafone data products. The programme is operational in eight controlled markets and will be extended across the rest of the Vodafone footprint during the 2007 financial year. This engagement with the IT channel considerably extends Vodafones ability to sell to small and medium enterprises and small business customers as well as providing a key platform to support the launch of notebooks with built in 3G broadband during the coming year.
The last few years have seen the growth of MVNOs who buy access to existing networks and re-sell them to customers under a different brand name and proposition. Where such a relationship generates profitable use of network capacity and does not impact the Vodafone brand, a mobile operating subsidiary may consider entering into a partnership with an MVNO.
The Vodafone MNC units initial focus is on providing consistency across Vodafone markets for existing corporate solutions, together with dedicated global customer service and global account management. The MNC vision is worldwide communications made easy for global businesses. In the year since launch, the Vodafone MNC unit can offer a consistent BlackBerry from Vodafone solution in 12 markets, a Master Service Agreement covering nine countries, a global helpdesk offering third line support to the administrator of the global accounts, account and service management at a global and local level in over 20 markets with full support from a technical team to implement existing solutions, and help develop tailored solutions.
Summary of Group products and services
The Group has also previously targeted mobile capitalised fixed asset additions in the 2008 financial year to be 10% of mobile revenue as a result of the initiatives.
Further, revenue enhancement initiatives were expected to deliver benefits equivalent to at least 1% additional revenue market share in the 2008 financial year compared with the 2005 financial year, which the Group is measuring in Germany, Italy, Spain and the UK against its principal competitors.
The Group has updated its One Vodafone targets to reflect both the new organisational structure and additional cost saving initiatives.
Capitalised fixed asset additions are expected to be 10% of revenues in the 2008 financial year for the total of the Groups Europe region and its common functions.
The Group now expects the aggregate of payroll and other operating expenses to be broadly stable in the 2008 financial year when compared to the 2006 financial year for the total of the Groups Europe region and its common functions, assuming no significant changes in exchange rates, after adjusting for acquisitions and disposals, and excluding the potential impact from its New Businesses unit and any one off business restructuring costs.
The objective for the 2006 financial year has been to commence implementation of the plans outlined last year. Significant benefits are expected in the 2007 financial year, with the full targets expected to be met in the 2008 financial year.
The One Vodafone programme has focused on six key initiatives, as follows:
and Development (R&D)
The Groups R&D function provides technical leadership, and a programme of research support, into technology that will typically start to be used in the business in three years and beyond. Governance is provided by the Group R&D Board which is chaired by the Group R&D Director and consists of the chief technology officers from four of the mobile operating subsidiaries, together with the heads of Future Products, Business Strategy, Terminals and Technology Development.
The Groups R&D function focuses on applied research that is positioned between the basic research undertaken by universities and commercial product development. The emphasis of the Groups R&D work programme is on providing technology analysis and vision that can contribute directly to business decisions, enabling new applications of mobile telecommunications, using new technology for new services, and research for improving operational efficiency and quality of the Groups networks. The work programme is organised into technology research and application research. The technology research is concerned with core radio, network and service enabling technologies. It includes business modelling techniques, application of social science and analysis of disruptive technologies. The application research is concerned with developing new business applications of radio based technologies for commercial launch. Both areas of research are directed to expanding business boundaries and opportunities through advances in technology, science and business practice.
The work of the Groups R&D function is delivered through a series of programmes with a substantial number of trials, demonstrations and protoypes. All work is set in a business and social context. There is growing emphasis on work that secures intellectual property rights or can otherwise lead to Vodafone having stronger influence on the technology it will deploy in the future. In addition, the Groups R&D function provides leadership for funding research into health and safety aspects of mobile telecommunications and technical leadership for the Groups spectrum strategy.
The main themes currently being researched are the evolution of 3G, new application areas for mobile communications and convergence with the internet. The basis of the Groups 3G radio technology is W-CDMA and enhancements to provide a higher speed version, usually referred to as HSDPA, or High-Speed Uplink Packet Access (HSUPA), are currently being rolled out. The focus over the last year has been on setting scientifically justifiable targets for the long term evolution of the 3G radio interface and establishing these within the industry. Evolutions to the core network based on ubiquitous use of internet protocols and web services complement this, and are leading to a convergence of internet and mobile technologies. Several internet based or converged services have been prototyped and demonstrated within the Vodafone community. Significant R&D effort has also been dedicated to transferring previous research results in mobile TV to the Groups marketing and technology functions to provide the basis for the Vodafones mobile TV programme. Applications of mobile telecommunications to health and well being, intelligent transport systems and the digital home are also being researched.
Much of the work of the Groups R&D function is done in collaboration with others, both within the Group and externally. Joint R&D facilities have been set up with three major infrastructure suppliers. Infrastructure and handset suppliers work with the Groups R&D function on many of its projects, from providing equipment for trials, through coauthoring research reports, to being a partner in some of the R&D programmes. At the more academic end of the spectrum of applied research, the Groups R&D function continues to develop relationships with a number of universities. These relationships include sponsoring research students, collaboration in European research activities, funding specialised research centres and working with Vodafone funded chairs and readerships. This year, the Groups R&D function hosted an Academic Conference where
it brought together its academic partners to consolidate its academic research programme.
The R&D programme provides the Group with long term technical policy, strategy and leadership, as well as providing technical underpinning for the Groups public policies and government relations, and is shared with all of the Groups mobile operations and common functions. They are able to influence the programme through working relationships that are designed to allow delivery of the results of the programme directly into the business units where they are needed.
The Group expensed £206 million in the 2006 financial year on R&D, compared with £198 million in the 2005 financial year, and capitalised development costs of £10 million (2005: nil). Besides the core R&D outlined above, this expenditure was incurred principally on developing new products and services, billing systems and network development.
Arcor is the second largest fixed line telecommunications provider in Germany. Based on its own Germany-wide voice and data network, Arcor offers its customers a range of services for voice and data transfer, with a focus on direct access based broadband and internet protocol enabled virtual private network (IP-VPN) products. The Groups ownership interest in Arcor is 73.7% and it is accounted for as a subsidiary.
The merger of Cegetel and Neuf Telecom completed on 22 August 2005, creating the leading alternative operator for fixed telecommunication services in France, offering a wide range of fixed line telephone services to residential and business customers as well as special corporate services ranging from internet and customer relations management to internet and intranet hosting services. The new entity, Neuf Cegetel, has the largest alternative broadband network in France, with 70% population coverage. The Groups indirect ownership interest in Neuf Cegetel is 12.4% and it is accounted for as an associated undertaking. In May 2006, the Groups indirect ownership interest increased to 15.4%.
Bharti is an Indian based mobile fixed line telecommunications operation with three strategic business units: mobility, enterprise services and broadband. The Groups ownership interest in Bharti is 10% and it is accounted for as a joint venture.
History and Development of the Company
Between 1991 and 1999, the Group consolidated its position in the United Kingdom and enhanced its international interests through a series of transactions. At 31 March 1999, the Group had subsidiary mobile network operating companies (mobile operating subsidiaries) in six countries (the UK, the Netherlands, Greece, Malta, Australia and New Zealand), as well as equity interests in a further seven countries, and a proportionate mobile customer base of 10.4 million.
The Group completed a number of business transactions between 1999 and 31 March 2003, which transformed the Company into the worlds leading international mobile telecommunications company. The most significant transactions were:
By 31 March 2003, the Group controlled mobile operations in 16 countries and held equity investments in mobile operations in a further 12 countries. The proportionate mobile customer base was 119.7 million at that date.
Transactions since 31 March 2003
Czech Republic and Romania
for cash consideration of approximately $3.5 billion (£1.9 billion) which was funded from the Groups cash resources. In addition, the Group assumed approximately $1.0 billion (£0.6 billion) of net debt. The remaining 0.9% of MobiFon was acquired in a separate transaction in the 2006 financial year.
On 1 February 2006, Oskar was renamed Vodafone Czech Republic.
Vodafone Greeces shares were delisted from the Athens and London Stock Exchanges on 15 July 2004 and 20 August 2004 respectively.
Between 24 January 2005 and 31 March 2005, the Group acquired a further 0.4% interest in Vodafone Greece through private transactions at a price equal to the price paid in the public offer.
In the first half of the 2005 financial year, the Group subscribed for HUF 89,301 million (£248 million) shares in Vodafone Hungary, increasing the Groups stake to 92.8%. On 24 September 2004, the Group entered into a sale and purchase agreement to acquire the remaining 7.2% shareholding from Antenna. This transaction completed on 12 January 2005 with the effect that Vodafone Hungary became a wholly owned subsidiary of the Group.
On 25 May 2004, the Groups wholly owned subsidiary, Vodafone International Holdings B.V., announced offers for the shares not held by the Group in Vodafone Holdings K.K. and Vodafone K.K. As a result of these offers, the Group increased its effective shareholding in Vodafone K.K. to 98.2% and its stake in Vodafone Holdings K.K. to 96.1% for a total consideration of £2.4 billion. On 1 October 2004, the merger of Vodafone K.K. and Vodafone Holdings K.K. was completed and the Group held a 97.7% stake in the merged company, which was renamed Vodafone K.K. Subsequently, on 1 August 2005, shares in Vodafone K.K. were delisted from the Tokyo Stock Exchange.
Vodafone K.K was subsequently sold on 27 April 2006. Further details are provided in the section on Disposals below.
On 31 March 2004, the Group increased its effective interest in Vodafone Sweden to 100% by the purchase of 1,320,000 shares which were held in treasury by Vodafone Sweden.
Vodafone Sweden was subsequently sold on 5 January 2006. Further details are given on page 115.
On 11 May 2005, SFR announced an agreement to merge its fixed line business, Cegetel, with Neuf Telecom, subject to competition and regulatory authority and employee council approvals which were received, and the transaction completed, on 22 August 2005. Under the agreement, SFR purchased SNCFs 35% minority interest in Cegetel, according to a pre-existing contract, and then contributed 100% of the capital of Cegetel to Neuf Telecom. In return, SFR received a 28% interest in the combined entity, Neuf Cegetel, together with a €380 million bond to be issued by Neuf Cegetel, bringing the Groups effective shareholding in Neuf Cegetel to 12.4%.
On 17 March 2006, the Group announced an agreement to sell its 97.7% holding in Vodafone Japan to SoftBank. The transaction completed on 27 April 2006 for cash consideration of approximately ¥1.42 trillion (£6.9 billion) including the repayment of intercompany debt of ¥0.16 trillion (£0.8 billion). In addition, the Group received non-cash consideration with a fair value of approximately ¥0.23 trillion (£1.1 billion), comprised of preferred equity and a subordinated loan. SoftBank also assumed debt of ¥0.13 trillion (£0.6 billion).
On 26 January 2005, the Group completed the disposal of a 16.9% stake in Vodafone Egypt to Telecom Egypt, reducing the Groups effective interest to 50.1%.
The EU Framework consists of four principal Directives outlining matters such as the objectives to be pursued by national regulatory authorities (NRAs), the way in which telecommunications operators are to be licensed, measures to be taken to protect consumers and ensure universal provision of certain telecommunications services and the terms and basis upon which operators interconnect and provide access to each other.
The EU Framework introduces a number of important changes to the previous framework. It is intended to align the techniques for defining where sector specific regulation may be applied and the threshold for when such regulation can be applied with those already employed in EU competition law. It is also intended to ensure greater consistency of approach amongst NRAs within the Member States. All NRAs are required to take utmost account of the list of markets which are specified by the European Commission (the Commission) in a Recommendation when deciding which markets to investigate. The first such Recommendation was published by the Commission in February 2003 and includes markets at a wholesale level, for voice call termination on individual mobile networks (the call termination market), the wholesale national market for international roaming (the roaming market) and the wholesale market for access and call origination (the access market) on public mobile networks (together the relevant markets). NRAs may, with the Commissions consent, also propose markets not included in the Recommendation. The Commission will periodically review the Recommendation and the Commission has said it expects to complete the first such review by the end of 2006. This review may lead to an increase or a decrease in the number and scope of markets subject to sector specific regulation. Changes to the Recommendation are expected to become effective at the conclusion of the review,
while any changes to the framework would become effective following their transposition into national law, from approximately 2010 onwards. So far, the Commission has signalled that only minor changes to the regulatory framework will be considered. Whether the reviewed regulatory framework will increase or decrease the regulatory burden on the Group will depend on the changes being adopted by the EU, the manner in which revised directives are subsequently implemented in Member States and how the revised regulatory framework will be applied by the respective NRAs.
Regulation, under the EU Framework, can only be applied to undertakings with significant market power (SMP) (either individually or collectively) in the relevant markets, subject to the Commissions consent. SMP under the EU Framework accords with the concept of dominance under existing EU competition law. This generally implies a market share of at least 40%, although other factors may also be taken into consideration. The SMP threshold under the previous framework required only a 25% share of the relevant market. The Commission published SMP Guidelines in July 2002, which set out principles for use by NRAs in the analysis of markets to determine if undertakings have SMP under the EU Framework.
On 12 June 2006, the Commission announced that it had ‘fine tuned’ its proposals so as to set the maximum wholesale roaming charge for a local call (within the visited country) at twice the average EU mobile termination rate and that the price of international calls (from the visited country) will be set at three times the mobile termination rate. Retail prices would be capped at wholesale rates plus an allowance for retail costs of 20-30%. These proposals are now subject to consultation within the European Commission before being presented for consideration by the European Parliament and Member States, expected in July. The Commission expects the regulation to become law during 2007. In July 2005, the Commission, supported by the European Regulation Group (ERG), a body established under the EU Framework and comprising all EU NRAs, also called for greater transparency of roaming tariffs and in October 2005 launched a website to inform the public about roaming tariffs within the EU. The website was updated in March 2006.
Anti-trust proceedings in relation to international roaming continue. In July 2004, the Commission issued a statement of objections, a document detailing its proposed findings, following its investigation into the UK market for wholesale international roaming and, in January 2005, the Commission issued a statement of objections following its investigation of the German market. In both cases, the statement of objections was addressed to both the national mobile operating subsidiaries and to the Company and, in both cases, Vodafone has responded both in writing and in oral proceedings.
The Commissions proposed findings are that Vodafone has monopoly power over its wholesale customers in both the UK and Germany. Vodafone UK and Vodafone Germany are alleged to have engaged in excessive or unfair pricing. The Commission alleges that the abuse occurred from 1997 to at least September 2003 in the UK and from 2000 to December 2003 in Germany. In the event the Commission finds that there has been a breach of competition law, it may impose a fine on any addressee who had committed the breach.
Separately, the roaming market is one of the relevant markets in the Recommendation. In May 2005, the ERG adopted a common position on international roaming and several NRAs have since then commenced their reviews of the roaming market but no NRA has proposed any regulation in this market. NRAs in Finland and Italy have concluded their market analysis and found no operator to have SMP. The French regulator has concluded that no operator has SMP in the traditional sense but has proposed an extended definition of joint SMP which, if approved, could lead to a finding that all three French operators are jointly dominant. In addition, it has asked the Commission to take action using instruments outside of the existing Framework.
In February 2004, the NRA decided to award licences for 450MHz spectrum for the provision of public access mobile radio services. Vodafone Germany is appealing this decision.
The NRA has concluded that it will seek to harmonise the expiry of all 2G licences in 2016 and it will extend the terms of all licences ceasing prior to this date, including the licence held by Vodafone subject to agreement on fees. The NRA has also decided to award certain 900MHz frequencies to O2 and EPlus. The NRA is now developing proposals to license new spectrum at 2.6 GHz, often referred to as the 3G extension band, and is considering the auction of unused 3G spectrum at 2 GHz at the same time.
The NRA has concluded that all mobile network operators have SMP in the call termination market and has imposed obligations on Vodafone Italy of cost orientation, non-discrimination and transparency. In September 2005, Vodafone Italy reduced its rates by 19% from 14.95 eurocents to 12.10 eurocents. The NRA foresees further reductions to 11.20 eurocents from 1 July 2006 and by 13% below the retail prices index on both 1 July 2007 and 1 July 2008. Vodafone Italy has appealed the NRAs decision.
The NRA concluded its review of the access market in February 2006 and found that no operator had SMP but has said it will keep the market under review.
In March 2005, the National Competition Authority (NCA) in Italy conducted unannounced inspections of the offices of mobile network operators in Italy, including Vodafone Italy, seeking evidence of collusion following complaints by resellers and potential MVNOs about alleged anti-competitive conduct. In November 2005, Vodafone Italy received a further request for information from the NCA. In February 2006, the NCA decided to prolong the duration of the proceeding until December 2006. If the NCA were to decide that there had been a breach of competition law, it would be able to impose a fine on any operator who had committed the breach.
In March 2006, the NRA published for consultation the draft analysis of the roaming market and found no operator to have SMP.
In September 2005, the NRA announced a 10.57% reduction in Vodafones mobile termination rates, which was implemented by Vodafone Spain in November 2005. On 23 February 2006, the Spanish NRA found all mobile network operators to have SMP in the call termination market and imposed obligations including non-discrimination, cost orientation and accounting separation on Vodafone Spain. A further reduction in rates is expected on 1 September 2006.
In February 2006, the NRA found that the three mobile network operators held a position of joint SMP in the access markets. This decision was reviewed by the European Commission and the NRA allowed to proceed. The NRA has decided to impose a wholesale network access obligation at reasonable prices facilitating the entry of firms including MVNOs. Vodafone has appealed the decision of the NRA to find Vodafone as holding SMP in the Spanish courts and has appealed the decision of the European Commission to allow the NRA to proceed to the Court of First Instance at Luxembourg.
The NRA conducted and concluded its review of the access market and found that no operator had SMP. The NRA found that all mobile network operators have SMP in the call termination market and required Vodafone UK to reduce its termination charge for calls conveyed over the 2G network, with effect from September 2004, to a target average charge of 5.6 pence per minute. In December 2005, the NRA decided to maintain this price control until 31 March 2007. The NRA has now embarked upon consultation on proposals to regulate the call termination market in respect of calls conveyed over both 2G and 3G networks from April 2007.
The NRA has proposed that 2G mobile frequencies will be tradable in 2007. The NRA is assessing whether holders of 2G spectrum can use it to provide 3G services. The NRA is also consulting on a specific proposal to liberalise spectrum usage rights more generally.
The NRA plans to award spectrum via auction in the 1.7 and 2.1 GHz bands beginning in June 2006.
Other Mobile Operations
Vodafone Albania has submitted its comments and objections on the NRAs market analysis. In addition, Vodafone Albania has been notified by the NCA of an investigation into alleged excessive pricing of mobile services. In May 2006, a Parliamentary Investigation Commission was established to investigate the two mobile operators and to prepare recommendations for liberalisation of the market.
In May 2005, a new law implementing the EU Framework came into effect. Mobile number portability was implemented in January 2006.
In February 2005, the NRA announced proposals to award a third mobile licence. The licence will be technology neutral and enable both 2G and 3G services. The licence is expected to be awarded by September 2006. The NRA is planning to negotiate the award of 3G licences to the two existing mobile network operators by September 2006. Mobile number portability and national roaming are expected to be implemented in Egypt by April 2007.
In August 2005, each of the mobile network operators was fined €500,000 for failing to implement mobile number portability.
In March 2006, the three largest mobile network operators were found by the NRA to have colluded in the setting of retail SMS prices and were fined €1 million each. Vodafone Greece has filed an administrative appeal.
In April 2005, the Council of State issued a judgement that base stations erected by mobile operators prior to August 2002 did not meet legal requirements. The new law seeks to remedy this but also prohibits the installation of base stations in schools and hospitals and decreases EMF exposure limits.
In March 2005, Vodafone Greece was made aware of a security issue in its network. Software foreign to the network, and capable of performing interception, had been installed in the network without Vodafones knowledge. The software was created, supported and maintained by an external supplier. The foreign software was removed without delay and the Greek authorities promptly informed. The authorities conducted investigations and subsequently made the matter public in February 2006. Since then, further investigations have taken place and continue. Vodafone Greece is co-operating with the Greek authorities.
In its review of the call termination market, the NRA has found that all mobile network operators have SMP. The NRA has imposed obligations of cost orientation and non-discrimination on all operators and accounting separation and transparency on Vodafone and O2. The NRA is also considering the use of price controls. Vodafone Ireland has agreed to reduce its rates by 11% below the retail price index per annum for the 24 months commencing January 2006.
In February 2006, the NRA withdrew a 3G licence it had awarded to Smart Telecom in November 2005. Smart Telecom is appealing this decision.
Vodafone Malta and Go Mobile were awarded 3G licences in August 2005. The third 3G licence remains unassigned. In October 2005, Vodafone Malta was awarded a Broadband Wireless Access frequency licence to operate a nationwide network.
Number portability was implemented on 31 March 2006.
In its review of the access market, the NRA found that no mobile network operator had SMP.
The Government is consulting on the extension or renewal of the existing 2G 900 MHz licences which expire in 2010.
The NRA is also reviewing regulation of national roaming and co-location and disputes submitted by Vodafone in relation to certain local interconnection services. It has also recently announced a review to determine whether further regulation or changes to existing regulation are necessary to promote competition in the mobile services market.
The NRA has approved industry plans for the introduction of mobile number portability and has set a date of April 2007 for its introduction.
The government is in the process of determining the price for renewal of 2G licences which expire in 2011.
Vodafone Portugal has requested the renewal of its 2G licence, which is due to expire in October 2006, and the Government has proposed terms which remain largely unchanged from those which already apply to the licence.
Number portability will be implemented in Romania during the 2007 financial year, with the obligation for all mobile and fixed operators to provide number portability to customers no later than June 2007.
In March 2006, the NRA recommended to the Department of Telecommunications that mobile number portability should be implemented by 1 April 2007.
In November 2005, the government announced a lifting of the foreign direct investment ceiling from 49% to 74% in the telecom sector, subject to certain preconditions. The deadline for compliance is 2 July 2006.
The Department of Telecommunications is expected to issue a new national spectrum policy before the end of 2006. The new policy is expected to include plans for allocation of 3G spectrum.
In April 2006, the NRA commenced a review of interconnection and retail prices, which may result in new interconnection and retail price regulations.
Safaricom, Vodafones joint venture, has been given until December 2006 to relinquish 2.5MHz of paired 900 MHz spectrum in return for the allocation of 1800MHz spectrum. It is proposed that the relinquished 900 MHz spectrum will be given to a new third mobile licensee. In September 2005, Safaricom filed an application for permanent 3G spectrum.
The NRA awarded a fourth 3G licence in 2005, which Polkomtel is appealing. In November 2005, the President of the NRA initiated the process to issue a new 2G licence. In January 2006, three companies submitted offers which are now under consideration.
Mobile number portability for contract customers was implemented by the mobile network operators in January 2006.
An Information Communication Technologies Black Economic Empowerment Charter (the Charter) is expected to be finalised in 2006. The Charter will set targets to evaluate a companys contribution to Broad-Based Black Economic Empowerment, which is the Government policy to increase economic empowerment of historically disadvantaged individuals in South Africa. Targets will be set in terms of equity ownership, management and control, employment, skills development, procurement, enterprise development and corporate social investment.
In May 2005, the NRA commenced an investigation to assess whether Vodacom, the Groups joint venture in South Africa, has major operator status, which is similar to SMP, in the interconnection market. Vodacom has challenged the grounds for this investigation in court, with a hearing expected before the end of 2006.
In 2005, the NRA commenced investigations on mobile pricing and handset subsidies. Separately, in May 2005, the NCA commenced an investigation into alleged excessive pricing of mobile termination rates. These investigations remain ongoing. Vodafone has been notified of the commencement of judicial review proceedings of the decision under competition law approving its acquisition of VenFin.
Associated undertakings and investments
The NRA held an initial consultation on the renewal of Vodafones associated undertaking, Proximus, 2G licence which expires in 2010.
In January 2006, the NCA conducted unannounced inspections of the offices of Proximus seeking evidence of anti-competitive behaviour in relation to the market for corporate customers following a complaint by a competitor. These enquiries are continuing. If the NCA decides that there had been a breach of competition law, it would be able to impose a fine on any operator who had committed the breach.
In December 2003, a French consumers association lodged a complaint with the NCA alleging collusion amongst the three French mobile operators on SMS retail pricing. The NCA is still investigating this complaint. Independently, the NRA has commenced a review of SMS termination and is consulting on proposals for wholesale price regulation and the notification of a wholesale SMS market to the Commission under the EU Framework. If it proceeds, the French NRA would be the first to do so in Europe. In its consultation, the NRA proposes a price cap for wholesale termination of no greater than 2.5 eurocents per minute. In addition, following two complaints against SFR and Orange France, the NRA ordered Bouygues and SFR, and Bouygues and Orange, respectively, to reduce their symmetric wholesale SMS termination rates to 4.3 eurocents per message with effect from 1 July 2005.
In December 2005, the NCA decided that SFR and the other mobile network operators had contravened competition law during the period from 1997 to 2003 by sharing information and during the period from 2000 to 2002 by entering into an agreement aimed at stabilising the development of market shares. SFR has been fined €220 million. SFR has appealed against this decision.
Following the NRAs review of the access market, the NRA proposed that all three mobile network operators, including SFR, had joint SMP in the market and it proposed access obligations as a remedy. The proposals were notified to the Commission in April 2005 but the NRA has subsequently withdrawn its proposals.
In July 2005, the Swiss NCA started a preliminary investigation concerning access to mobile networks. At the end of November 2005, the Swiss NRA commenced a process to award three licences for broadband wireless access and Swisscom Mobile is participating in an auction which will take place in the summer of 2006.
On 19 July 2002, the European Parliament adopted Regulation No. 1606/2002 requiring listed companies in the Member States of the European Union to prepare their Consolidated Financial Statements in accordance with IFRS from 2005. This is the first time the Companys Annual Report has been prepared under IFRS. Consequently, financial information for the year ended 31 March 2005, presented as comparative figures in this report, has been restated from UK GAAP in accordance with IFRS, as disclosed in note 40 to the Consolidated Financial Statements.
The Consolidated Financial Statements, which are prepared in accordance with IFRS, differ in certain significant respects from US GAAP. Reconciliations of the material differences in the IFRS Consolidated Financial Statements to US GAAP are disclosed in note 38 to the Consolidated Financial Statements, US GAAP information.
The Group faces a number of significant risks that may impact on its future performance and activities. Please see Risk Factors, Trends and Outlook.
Foreign Currency Translation
The following table sets out the pounds sterling exchange rates of the other principal currencies of the Group, being: euros, € or eurocents, the currency of the EU Member States which have adopted the euro as their currency, and US dollars, $, cents or ¢, the currency of the United States.
Merely for convenience, this Annual Report contains translations of certain pounds sterling amounts into US dollars at specified rates. These translations should not be construed as representations that the pounds sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated or at any other rate. Unless otherwise indicated, the translations of pounds sterling into US dollars have been made at $1.7393: £1.00, the Noon Buying Rate in the City of New York for cable transfers in sterling amounts as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) on 31 March 2006. The Noon Buying Rate on 26 May 2006 was $1.8566: £1.00.
The following table sets out, for the periods and dates indicated, the period end, average, high and low Noon Buying Rates for pounds sterling expressed in US dollars: £1.00, to two decimal places.
Presentation of Information
Critical Accounting Estimates
The Group prepares its Consolidated Financial Statements in accordance with IFRS, the application of which often requires judgements to be made by management when formulating the Groups financial position and results. Under IFRS, the directors are required to adopt those accounting policies most appropriate to the Groups circumstances for the purpose of presenting fairly the Groups financial position, financial performance and cash flows. The Group also prepares a reconciliation of the Groups revenue, net profit and shareholders equity between IFRS and US GAAP.
In determining and applying accounting policies, judgement is often required in respect of items where the choice of specific policy, accounting estimate or assumption to be followed could materially affect the reported results or net asset position of the Group should it later be determined that a different choice would be more appropriate.
Management considers the accounting estimates and assumptions discussed below to be its critical accounting estimates and, accordingly, provides an explanation of each below. Where it is considered that the Groups US GAAP accounting policies differ materially from the IFRS accounting policy, a separate explanation is provided.
The discussion below should also be read in conjunction with the Groups disclosure of significant IFRS accounting policies, which is provided in note 2 to the Consolidated Financial Statements, Significant accounting policies and with the Summary of differences between IFRS and US GAAP provided in note 38 to the Consolidated Financial Statements.
Management has discussed its critical accounting estimates and associated disclosures with the Companys Audit Committee.Impairment reviews
Asset recoverability is an area involving management judgement, requiring assessment as to whether the carrying value of assets can be supported by the net present value of future cash flows derived from such assets using cash flow projections which have been discounted at an appropriate rate. In calculating the net present value of the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters, as noted below.
IFRS requires management to undertake an annual test for impairment of indefinite lived assets, and for finite lived assets, to test for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Group management currently undertakes an annual impairment test covering goodwill and other indefinite lived assets, and also reviews finite lived assets and investments in associated undertakings at least annually to consider whether a full impairment review is required. In the year to 31 March 2006, the Group has recognised impairment losses amounting to £23,515 million relating to the Groups mobile operations in Germany, Italy and Sweden, of which £23,000 million was recognised following completion of the annual impairment test.
For purposes of goodwill impairment testing under US GAAP, the fair value of a reporting unit including goodwill is compared to its carrying value. If the fair value of a reporting unit is lower than its carrying value, the fair value of the goodwill within that reporting unit is compared with its respective carrying value, with any excess carrying value written off as an impairment. The fair value of the goodwill is the difference between the fair value of the reporting unit and the fair value of the net assets of the reporting unit.
Following the issuance of EITF Topic D-108, Use of the Residual Method to Value Acquired Assets Other Than Goodwill, in the year ended 31 March 2005, the Group, in respect of the indefinite lived licences in Verizon Wireless, was required to perform a transitional impairment test on indefinite lived intangible assets other than goodwill by comparing the carrying amount with the fair value of the asset determined on a standalone basis. In the year ended 31 March 2005, the cumulative effect on net loss of adopting this standard was £6,177 million, net of taxes of £5,239 million.
The Group prepares and internally approves formal ten-year plans for its businesses and uses these as the basis for its impairment reviews. Management uses the initial five years of the plans, except in markets which are forecast to grow ahead of the long term growth rate for the market. In such cases, further years will be used until the forecast growth rate trends towards the long term growth rate, up to a maximum of ten years.
For mobile businesses, a long term growth rate into perpetuity has been determined as the lower of:
For non-mobile businesses, no growth is expected beyond managements plans for the initial five year period.
Changing the assumptions selected by management, in particular the discount rate and growth rate assumptions used in the cash flow projections, could significantly affect the Groups results. The Groups review includes the key assumptions related to sensitivity in the cash flow projections.
The following changes to the assumptions used in the impairment review would have (increased)/decreased the combined impairment loss recognised in the year ended 31 March 2006 in respect of the Groups mobile operations in Germany and Italy:
These assumption changes in isolation would not have resulted in an impairment loss in any other of the Groups continuing operations.
Allocation of the purchase price affects the results of the Group as finite lived intangible assets are amortised whereas indefinite lived intangible assets, including goodwill, are not amortised, and could result in differing amortisation charges based on the allocation to indefinite lived and finite lived intangible assets.
On the acquisition of mobile network operators, the identifiable intangible assets may include licences, customer bases and brands. The fair value of these assets is
determined by discounting estimated future net cash flows generated by the asset, assuming no active market for the assets exist. The use of different assumptions for the expectations of future cash flows and the discount rate would change the valuation of the intangible assets.
If the Group had elected to apply the accounting for business combinations retrospectively, it may have led to an increase or decrease in goodwill and increase in licences, customer bases, brands and related deferred tax liabilities recognised on acquisition.
Intangible assets, excluding goodwill
The relative size of the Groups intangible assets, excluding goodwill, makes the judgements surrounding the estimated useful lives and basis of amortisation critical to the Groups financial position and performance.
At 31 March 2006, intangible assets, excluding goodwill, amounted to £16,512 million (2005: £16,149 million) and represented 13.0% (2005: 11.0%) of the Groups total assets.
Estimation of useful life
Licences and spectrum fees
Historically, changes in useful lives have not resulted in material changes to the Groups amortisation charge.
Property, plant and equipment
Estimation of useful life
The useful lives of Group assets are determined by management at the time the asset is acquired and reviewed annually for appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their life, such as changes in technology. Furthermore, network infrastructure cannot be depreciated over a period that extends beyond the expiry of the associated licence under which the operator provides telecommunications services.
Historically, changes in useful lives have not resulted in material changes to the Groups depreciation charge.
The growth in complexity of the Groups structure following its rapid expansion geographically has made the degree of estimation and judgement more challenging. The resolution of issues is not always within the control of the Group and it is often dependent on the efficiency of the legal processes in the relevant taxing jurisdictions in which the Group operates. Issues can, and often do, take many years to resolve. Payments in respect of tax liabilities for an accounting period result from payments on account and on the final resolution of open items. As a result, there can be substantial differences between the tax charge in the income statement and tax payments.
Significant items on which the Group has exercised accounting judgement include a provision in respect of an enquiry from UK HM Revenue and Customs with regard to the Controlled Foreign Companies tax legislation (see note 31 to the Consolidated Financial Statements), legal proceedings to recover VAT in relation to 3G licence fees (see Contingencies on page 39) and potential tax losses in respect of a write down in the value of investments in Germany (see note 6 to the Consolidated Financial Statements). The amounts recognised in the Consolidated Financial Statements in respect of each matter are derived from the Groups best estimation and judgement, as described above. However, the inherent uncertainty regarding the outcome of these items means eventual resolution could differ from the accounting estimates and therefore impact the Groups results and cash flows.
Recognition of deferred tax assets
Historical differences between forecast and actual taxable profits have not resulted in material adjustments to the recognition of deferred tax assets.
Critical Accounting Estimates
Revenue recognition and presentation
Any excess upgrade or tariff migration fees over the fair value of equipment provided are deferred over the average upgrade or tariff migration period as appropriate. This time period is calculated based on historical activity of customers who upgrade or change tariffs. An increase in the time period would extend the period over which revenue is recognised.
Where the Groups role in a transaction is that of principal, revenue is recognised on a gross basis. This requires turnover to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as an operating cost.
Where the Groups role in a transaction is that of an agent, revenue is recognised on a net basis, with turnover representing the margin earned.
Allowance for bad and doubtful debts
Changes to the allowance may be required if the financial condition of the Groups customers improves or deteriorates. An improvement in financial condition may result in lower actual write-offs.
Historically, changes to the estimate of losses have not been material to the Groups financial position and results.
Key Peformance Indicators
The Board and the Executive Committee monitor the Groups progress against its strategic objectives and the financial performance of the Groups operations on a regular basis. Performance is assessed against the strategy, budgets and forecasts using financial and non-financial measures.
The following details certain of the most significant Key Performance Indicators (KPIs) used by the Group, their purpose, the basis of calculation and the source of the underlying data. Definitions of certain of the terms are provided on page 49.
Revenue and revenue growth are used for internal performance analysis and by investors to assess progress against outlook statements provided externally by the Group.
Adjusted operating profit
Free cash flow
Adjusted earnings per share
divided by the average total customers in the period. Churn rates stated in this Annual Report are calculated for the entire financial year.
Customer delight is measured by an index based on the results of surveys performed by an external research company which cover all aspects of service provided by Vodafone and incorporates the results of the relative satisfaction of the customers of competitors. An overall index for the Group is calculated by weighting the results for each of the Groups operations based on service revenue.
Increased customer expectations are putting a downward pressure on customer satisfaction for the Group and many of its competitors. Despite this trend, the Group outperformed its target for customer delight in the 2006 financial year and the index was broadly stable compared to the previous financial year.
Revenue based measures
The data used to calculate these KPIs is derived from a number of sources. Financial information, such as service revenue, is extracted from the Groups financial systems, whilst operational information, including customer and usage metrics, is derived from the customer relationship management and billing systems of each of the Groups operations.
revenue per user (ARPU)
Messaging and data revenue
Capitalised fixed asset additions as a percentage of mobile revenue
This measure is calculated as capitalised fixed asset additions for the mobile telecommunications business (note 3 to the Consolidated Financial Statements) as a percentage of the revenue of the mobile telecommunications businesses (note 3 to the Consolidated Financial Statements). In the 2006 financial year, capitalised fixed asset additions as a percentage of mobile revenue was 13.7% compared with 16.4% for the previous financial year.
2006 financial year compared to 2005 financial year
The Group recorded an impairment charge to the carrying value of goodwill in the Groups operations in Germany (£19,400 million) and Italy (£3,600 million) reflecting a revision of the Groups view of the prospects for these businesses, particularly in the medium to long term, and a further £515 million was recorded in respect of the Swedish business following the announcement of its disposal. This was the primary reason for the operating loss of £14,084 million in the current financial year compared with an operating profit of £7,878 million in the previous financial year. Adjusted operating profit increased by 12.5% to £9,399 million, with organic growth of 11.4%, following organic growth of 10.3% in the Groups mobile business. Favourable exchange rate movements benefited reported growth for the Group by 1.0% whilst the net impact of acquisitions and disposals improved reported growth by 0.1%.
Voice revenue increased by 8.1%, or by 5.3% on an organic basis, due to by the growth in average customers and a successful usage stimulation programme leading to 24.6% growth in total minutes, or 18.9% on an organic basis, offset by tariff declines from competition and termination rate cuts. Revenue from outgoing calls was the primary driver of voice revenue growth, whilst incoming voice revenue increased marginally as a significant increase in the proportion of incoming calls from other mobile networks was offset by the impact of termination rate cuts, particularly in the second half of the current financial year.
Messaging revenue rose by 13.1%, or 10.6% on an organic basis, as an increase in the average customer base and the number of messages sent per customer was offset by tariff declines.
The success of 3G, Vodafone live! and offerings in the business segment, including Vodafone Mobile Connect data cards and BlackBerry from Vodafone, were the main contributors to a 61.2% increase, or 60.4% on an organic basis, in non-messaging data revenue. An additional 6,321,000 3G devices were registered on the Groups networks in the current financial year, bringing the total to 7,721,000 at 31 March 2006, including 660,000 business devices such as Vodafone Mobile Connect 3G/GPRS data cards. Prior to the announcement of the disposal of Vodafone Japan in March 2006, the Group registered its ten millionth consumer 3G device, when including 100% of the devices in Italy.
Other revenue increased to £2,256 million, principally due to growth in revenue related to acquisition and retention activities in Spain, partially offset by a reduction in net other revenue, resulting principally from to a fall in the number of customers connected to non-Vodafone networks in the UK. A 32.5% rise in the number of gross customer additions, partially offset by a fall in the average revenue for handset sales to new prepaid customers and a 24.3% increase in the number of upgrades, led to a 4.7% growth in revenue related to acquisition and retention activities to £1,724 million.
Adjusted operating profit
Interconnect costs increased by 7.2% on an organic basis, as strong growth in outgoing voice usage was partially offset by cuts in termination rates in a number of markets and an increased proportion of outgoing traffic being to other Vodafone customers, which does not result in interconnect expense. The rise in the number of upgrades and the increased cost of upgrading customers to 3G were the primary contributors to an 9.4% organic growth in acquisition and retention costs, net of attributable revenue, to £2,985 million. Payroll and other operating expenses as a percentage of service revenue continued to fall, reaching 22.2% for the year to 31 March 2006 compared to 22.4% for the previous financial year.
The charge relating to the amortisation of acquired intangible assets was £157 million following acquisitions in the Czech Republic, India, Romania and South Africa in the current financial year. Depreciation and other amortisation increased, principally due to the net impact of the acquisitions and disposal in the current financial year and the ongoing expansion of 3G networks.
The Groups share of the result in associated undertakings, before non-recurring amounts related to business acquisitions and disposals, grew by 20.2% after the deduction of interest, tax and minority interest, and 16.8% before the deductions, primarily due to growth at Verizon Wireless in the US. The Groups share of the result in Verizon Wireless increased by 25.5% to £2,112 million, before deduction of interest, tax and minority interest, with a particularly strong performance in the second half of the current financial year.
Net financing costs before dividends from investments increased by 8.5% to £318 million as an increase in average net debt compared to the previous year was partially offset by gains on mark-to-market adjustments on financial instruments in the current financial year.
Potential interest charges arising on the settlement of outstanding tax issues represents the Groups estimate of any interest that may be due to tax authorities when the issues are settled. This charge varies due to the interest rates applied by the tax authorities, the timing of tax payments and status of discussions on tax issues with the relevant tax authorities. At 31 March 2006, the provision for potential interest charges arising on settlement of outstanding tax issues was £896 million.
The change in the fair value of equity put rights and similar arrangements comprises the fair value movement in relation to the potential put rights held by Telecom Egypt over its 25.5% interest in Vodafone Egypt and the fair value of a financial liability in relation to the minority partners of Arcor, the Groups non-mobile operation in Germany. Further details in respect of these arrangements are provided in the section titled Liquidity and Capital Resources Option agreements and in note 24 to the Consolidated Financial Statements.
Basic loss per share
(Loss)/profit for the financial year from discontinued operations
On 17 March 2006, the Group announced that an agreement had been reached to sell its 97.7% interest in Vodafone Japan to SoftBank. This resulted in the Groups operations in Japan being classified as an asset held for sale and being presented as a discontinued operation. The disposal was completed on 27 April 2006.
Following the announcement on 17 March 2006, the Group recognised an impairment loss of £4,900 million in respect of Vodafone Japan. The recoverable amount of Vodafone Japan was the fair value less costs to sell.
On completion of the disposal of Vodafone Japan in April 2006, a loss on disposal was recognised as the difference between the final sale proceeds less costs to sell and the carrying value at the date of disposal. The loss on disposal includes, among other items, the cumulative exchange differences in respect of Vodafone Japan previously recognised in equity from 1 April 2004 through to completion.
In April 2006, the Group announced changes to the organisational structure of its operations, effective from 1 May 2006. The following results are presented in accordance with the organisation structure in place for the year to 31 March 2006.
The German market has seen recent intensification in price competition, principally from new market entrants, together with high levels of penetration and further reductions in termination rates. Despite this, Vodafone has continued to lead the market in the number of 3G customers, and has launched innovative products such as mobile TV and Vodafone Zuhause, which allows users to replace fixed line networks installed in their homes. In addition, Vodafone launched HSDPA technology in March 2006.
Total revenue increased by 1.2% as the benefits of a larger customer base and an increase in non-voice service revenue were partly offset by reduced voice pricing, in response to aggressive competition, and a further termination rate cut in December 2005 from 13.2 to 11.0 eurocents per minute. The average customer base grew by 8.4% due to the attractiveness of promotions, including an offer which allowed prepaid customers to pay a fixed charge for calls to fixed lines and other Vodafone customers, which was taken up by more than one and a quarter million customers, and new products such as Vodafone Zuhause, which had 448,000 registered customers at 31 March 2006. New prepaid tariffs, including a low priced internet only offer, and ongoing promotional activity, particularly in the last four months of the year, contributed to total voice usage increasing by 13.7%. Excluding the termination rate cut in December 2005, service revenue growth would have been 3.1% in local currency. A further cut in termination rates is currently expected by the end of 2006.
Non-voice service revenue increased by 13.4% in local currency, driven primarily by strong growth of 56.8% in non-messaging data revenue. Vodafone maintained its leadership in the 3G market, demonstrated by Vodafone live! with 3G customers generating over 3.1 million full track music downloads in the current financial year for Vodafone, more than any other mobile network operator in Germany. The number of active Vodafone live! devices continued to increase, with 28.3% growth in the year. In the business segment, there were 241,000 Vodafone Mobile Connect 3G/GPRS data cards and 226,000 wireless push e-mail enabled devices registered on the network at 31 March 2006. Messaging revenue increased 4.6%, in local currency, mainly as a result of promotional activities.
Overall cost efficiencies, counteracted by investments in customer acquisition and retention and an increase in Group charges for the use of the brand and related trademarks, which represented 1.1% of service revenue, lead to an increase in adjusted operating profit of 1.3% in local currency to £1,496 million. Growth in 3G customers and increased gross additions, partially offset by a rise in the proportion of low subsidy prepaid
additions, led to a 5.2% increase in net acquisition costs. Interconnect costs decreased by 0.3%, as the termination rate cuts in the current and previous financial years more than offset the effect of higher voice usage. An increase in the number of customer upgrades resulted in a 5.6% increase in net retention costs. Adjusted operating profit was further impacted by additional depreciation charges from continued 3G network deployment.
Competition in Italy has continued to intensify with the mobile network operators competing aggressively on subsidies and, increasingly, on price, particularly in the second half of the year. Vodafone achieved average customer growth of 6.9% driven by successful promotions despite the competitive environment and a market penetration rate well in excess of 100% due to customers having more than one SIM.
In local currency, total revenue rose by 2.0%, reflecting the increase in service revenue which was driven primarily by continuing growth in non-voice services as voice revenue declined marginally following an average 20.5% reduction in termination rates from September 2005. Excluding the impact of the termination rate cut, service revenue increased by 5.2% in local currency. Strong promotional activities, for example free calls after the first minute and free text messages for a small activation fee which were taken up by more than ten million customers, and the increase in the customer base led to a rise of 5.1% in voice usage and a 41.7% increase in messaging, including a 261% growth in MMS usage. An increase in the number of SIMs per user and competitive pressures led to a reduction in activity rates, especially in the second half of the year, and an increase in blended churn from 17.2% to 18.7%.
Non-voice service revenue rose by 16.5% in local currency, primarily driven by a 12.9% rise in messaging revenue. Increased penetration of 3G devices, a focus on retaining high value customers, increased usage of Vodafone live! and Vodafone Mobile Connect data cards and attractive data promotions were the main contributors to 45.2% growth in non-messaging data revenue.
In local currency, adjusted operating profit fell by 1.3% due to the impact of an increase in Group charges for the use of brand and related trademarks, which represented approximately 1.1% of service revenue, investment in customer acquisition and retention and higher marketing spend in response to the competitive pressures, along with the increased costs from the continued roll out of the 3G network. Strong upgrade
activities and a focus on high value customers in response to aggressive competition led to the rise in retention costs, whilst handset promotions adversely impacted acquisition costs, especially in the first half of the year. Interconnect costs fell due to the cut in termination rates combined with promotions focusing on calls to other Vodafone and fixed-line numbers, which incur lower interconnect costs, especially in the second half of the year. Other direct costs increased 3.8%, primarily as a result of an increase in content provision costs arising from the increase in data service usage.
Vodafone continued to perform strongly in Spain, in revenue growth and profitability, despite an increasingly competitive market, through promotions and competitive tariffs attracting new customers and encouraging prepaid customers to migrate to contract tariffs.
Total revenue for the financial year increased by 22.6% in local currency, due principally to a rise in service revenue achieved from an 18.5% growth in the average customer base and an improvement in ARPU, notwithstanding a 10.6% cut in the termination rate in November 2005. The launch of attractive tariffs, successful promotional campaigns and the offer of an appealing handset portfolio increased the average customer base and encouraged a further increase in the proportion of contract customers from 46.9% at 31 March 2005 to 49.6% at 31 March 2006. These factors contributed to a 34.0% increase in total voice usage compared with the previous financial year and a reduction in blended churn from 21.9% at 31 March 2005 to 20.9% at 31 March 2006.
The principal driver behind the 23.0% growth in messaging revenue in local currency was a 23.1% increase in messaging usage due to the higher customer base and targeted promotions. The growth of 62.1% in non-messaging data revenue was due to an increase of 814,000 in the number of registered 3G devices and the success of data solutions, which have contributed to Vodafone leading the 3G market in Spain, along with an 84.3% increase in the number of Vodafone live! devices.
Adjusted operating profit increased as a percentage of service revenue, as cost reductions were only partially offset by the impact of the increased Group charge for use of the brand and related trademarks. Interconnect costs fell as a proportion of service revenue, due to promotions which encouraged calls to be made to Vodafone and fixed-line numbers, which incur lower interconnect costs, and the cut in termination rates. A higher proportion of prepaid gross customer additions, which have a lower per unit acquisition cost, particularly in the first half of the financial year led to acquisition costs
falling as a proportion of service revenue compared to the previous financial year. These relative cost reductions were offset by the cost of upgrading customers to 3G handsets, migrating prepaid customers to contract tariffs and a larger customer base, reflected in a 45.3% increase in net retention costs. Other direct costs increased mainly due to increased content provision costs resulting from higher usage of the expanded offering on the Vodafone live! platform.
Vodafone UK continued to see strong growth in its customer base, without a corresponding increase in acquisition and retention investment, despite the UK being one of the most competitive markets in which the Group operates, with mobile penetration rates in excess of 100%. Enhanced data offerings led to strong growth in non-messaging data revenue and Vodafone now has over 1 million registered 3G devices.
Total revenue fell by 0.3%, as a 1.6% increase in service revenue was offset by a fall in equipment and other revenue. Service revenue grew by 3.2%, excluding the effect of the September 2004 termination rate cut, benefiting from an increase in average customers of 7.8%, partially offset by falling ARPU, notwithstanding a rise in usage. New customer offerings, including Stop the Clock, helped to stimulate a 10.1% increase in total voice usage, but this was offset by changes in prices during the year to improve competitiveness in the market, leading to an overall 0.8% decrease in voice revenue, which grew by 1.2% excluding the effect of the termination rate cut. A continuing focus on customer retention and an increasing proportion of customers on 18 month contracts had a positive impact on contract customer churn which fell from 22.7% to 21.5%, although blended churn increased to 32.1%, including the effect of increased prepaid customer self-upgrades, consistent with market trends.
Non-voice service revenue increased by 12.1%, driven largely by the success of enhanced data offerings. Growth of 843,000 over the financial year in registered 3G devices and the continued success of Vodafone Mobile Connect data cards and wireless push e-mail devices contributed to non-messaging data revenue increasing by 55.6%. Combined voice and messaging promotions led to an 18.1% increase in total messaging usage, although this was partially offset by a decline in the average price per message, and resulted in a 3.1% rise in messaging revenue.
The rise in interconnect costs and the cost of one-off call centre closures, as well as an increase in Group charges for use of the brand and related trademarks, which represented approximately 1.1% of service revenue, were partially offset by efficiencies in overheads and acquisition and retention costs, leading to a fall in adjusted operating profit of 10.3%. Interconnect costs increased by 11.8%, following an increase in total usage, combined with an increase in the proportion of voice calls made to customers of other mobile network operators, as customers optimise cross-network bundled tariffs, partially offset by the termination rate cut. Despite higher gross additions and upgrades, especially in the first half of the year, and a higher proportion of 3G connections, acquisition and retention costs were kept stable with the prior year, mainly due to an
increase in direct sales activity, SIM only promotions and a higher proportion of prepaid additions with lower subsidies. Payroll was 3% lower than the prior year and other operating expenses were lower than the prior year, excluding one-off call centre closures and the increase in Group charges for use of the brand and related trademarks, driven by the continued benefits of a structured cost reduction plan.
US Verizon Wireless
The US mobile telecommunications market has seen continued significant growth in customer numbers over the last twelve months, with penetration reaching an estimated 72% at 31 March 2006. In this environment, Verizon Wireless continued to increase its market share and improve its market leading margin performance.
Verizon Wireless outperformed its competitors with record net additions, increasing the proportionate customer base by 16.6% over the financial year to 23,530,000 and improving customer market share to approximately 25% whilst also maintaining the proportion of contract customers at 94.5% of the total customer base at 31 March 2006. The strong customer performance benefited from continuing improvements in customer loyalty, with a reduction in blended churn of 2.5 percentage points to 14.7% compared with the previous financial year, the lowest in the US mobile telecommunications industry.
In local currency, Verizon Wireless revenue increased by 14.9% due to the strong customer growth, partially offset by a fall in ARPU of 1.9%. The ARPU decline primarily resulted from an increase in the proportion of family share customers and voice tariff pricing changes implemented early in 2005, which included increases in the size of bundled minute plans.
Non-voice service revenue increased by more than 100% compared with the previous financial year and represented 8.9% of service revenue for the current year. Continued increases in messaging revenues were augmented by strong growth from data products, including Verizon Wireless consumer broadband multimedia offering, wireless email and broadband data card service. Verizon Wireless next-generation EV-DO network is currently available to about 150 million people, approximately half the US population. This investment has paved the way for the launch of innovative new data services in areas such as full track music downloads and location based services.
In local currency, the Groups share of Verizon Wireless operating profit increased by 21.5%, driven by revenue growth and maintaining a leading cost efficiency position in the US market. The Groups share of the tax attributable to Verizon Wireless of £116 million for the year ended 31 March 2006 relates only to the corporate entities held by the Verizon Wireless partnership. The tax attributable to the Groups share of the partnerships pre-tax profit is included within the Group tax charge.
Vodafone and Verizon Wireless are engaged in a number of joint projects, predominantly focusing upon bringing global services to their customers. The financial year saw the introduction of two new data roaming services for Verizon Wireless customers, in addition to the launch of new handsets for the global phone proposition, all of which leverage the Vodafone footprint.
Verizon Wireless continued to strengthen its spectrum position with the completion of the purchase of several key spectrum licences, including licences from Nextwave, Leap Wireless and Metro PCS and through participation in the FCCs Auction 58, which took place in February 2005, with licences being granted in May 2005.
Other Mobile Operations
Total revenue for the Groups Other Mobile Operations increased by 21.1%, or 12.6% on an organic basis. The net impact of acquisitions in the Czech Republic, India, Romania and South Africa and the disposal of the Groups Swedish operations during the year ended 31 March 2006 increased reported revenue growth by 6.8%. Favourable exchange rate movements accounted for 1.7% of the remaining difference between reported and organic growth. The increase in total service revenue was principally driven by an increase in the average customer base of 26.5% excluding the impact of the acquisitions and disposal and of 44.0% including the impact of the acquisitions and disposal. This effect was partially offset by cuts in termination rates in certain markets, reduced ARPU from the launch of more competitive tariffs and an increase in the number of lower usage prepaid customers.
Excluding the impact of termination rate cuts, service revenue growth would have been 25.0%. Messaging and non-messaging data revenue grew strongly, increasing by 18.6% and 74.1%, respectively, on an organic basis and by 28.7% and 77.0%, respectively, including the impact of acquisitions, disposals and exchange rate movements.
Adjusted operating profit increased by 6.8%, or 6.4% on an organic basis, over the comparative period, with 0.5% of the difference due to the acquisitions and disposal in the current financial year, offset by 0.9% resulting from favourable foreign exchange rate movements. The reported growth in adjusted operating profit in the year was impacted by a reduction in the profitability of certain highly competitive markets, in particular Australia and the Netherlands, though these factors were partially offset by the profit contributed by acquisitions in the year and the impact of the disposal of the Groups Swedish operations, as well as higher depreciation and purchased licence amortisation, following the launch of 3G services in Australia and New Zealand, and the amortisation of identifiable intangible assets from the acquisitions in the current financial year.
Service revenue in Egypt, when measured in local currency, grew by 36.2%, primarily as a result of an increase in the average prepaid customer base of 82.0% which was driven by new innovative tariffs improving access and affordability in the market place. Revenue market share increased by 3.8 percentage points in the 2006 financial year to 51.8%.
Competition in Portugal intensified during the year with aggressively priced no-frills offerings by competitors which, combined with cuts in the termination rate which resulted in the average termination rate this year being 28.3% lower than last year, led to local currency service revenue growth being restricted to 1.6%.
In the Netherlands, an increase of 3.5% in service revenue and a 10.0% growth in the average customer base was achieved.
Vodafone Australia increased its customer base by 16.0%, and local currency service revenue by 11.8% due to the popularity of the capped plans, which have resulted in a significant increase in outgoing voice usage, whilst adversely impacting outgoing voice revenue per minute and interconnect costs. 3G services were launched on 31 October 2005, with strong uptake resulting in 171,000 consumer 3G devices being registered on the network by 31 March 2006.
New Zealand achieved service revenue growth of 8.5%, driven by a 12.3% growth in the average customer base, due principally to the launch of competitive promotions during the year. 3G services were launched on 10 August 2005, with 103,000 3G devices registered by the end of the financial year.
In Ireland, service revenue grew by 5.9%, primarily due to an increase of 9.2% in total voice usage following a 5.9% increase in the average customer base. Voice usage per customer in Ireland remains the highest of all Vodafones European subsidiaries.
On 5 January 2006, the Group announced that it had completed the sale of its 100% interest in Vodafone Sweden to Telenor, the pan-Nordic telecommunications operator. Vodafone and Telenor have agreed the terms of a Partner Market Agreement in Sweden, allowing Telenors mobile customers in Sweden and Vodafone customers to continue to benefit from Vodafones global brand, products and services in Sweden.
Service revenue growth in Hungary and Albania, when measured in local currency, was 13.9% and 16.2% respectively. Vodafone Romania increased service revenue by 39.0% in local currency compared with the previous financial year, assuming the Groups increased equity interest is reflected in the whole of the current and prior financial year. Additionally, Vodafones newly acquired subsidiaries in the Czech Republic and Romania have performed ahead of the Groups expectations at the time of the acquisition.
Mobile joint ventures
During the financial year, the Group completed the acquisition of a 10% economic interest in Bharti Tele-Ventures Limited (now renamed Bharti Airtel Limited), a leading national mobile operator in India.
The Group also increased its effective shareholding in its joint venture in South Africa, Vodacom, from 35% to approximately 50% following the acquisition of VenFin.
Mobile associated undertakings
On 30 November 2005, the French competition authority fined SFR €220 million for engaging in anti-competitive agreements that distorted market competition. SFR is in the process of appealing this decision.
On 7 April 2006, the Swiss Competition Commission notified Swisscom Mobile, the Groups associated undertaking in Switzerland, of its intention to impose a fine of CHF489 million in relation to abusive pricing on the mobile wholesale call termination market between 1 April 2004 and 31 May 2005.
Common functions include the results of Partner Markets and unallocated central Group costs and charges. Adjusted operating profit increased primarily due to a revision of the charges made to Vodafone operating companies for the use of the Vodafone brand and related trademarks which took effect from 1 April 2005.
Other operations comprise interests in fixed line telecommunications businesses in Germany, France and India.
In the year ended 31 March 2006, revenue from continuing operations under US GAAP was £23,756 million compared with revenue from continuing operations under IFRS of £29,350 million for the same period. The difference relates to the equity accounting of Vodafone Italy under US GAAP, the treatment of Vodafone Sweden as discontinued under US GAAP and the release of connection revenue deferred prior to the adoption of EITF 00-21 on 1 October 2003, which is required to be recognised over the period a customer is expected to remain connected to the network under US GAAP.
Net loss under US GAAP for the year ended 31 March 2006 was £13,310 million, compared with a loss for the financial year under IFRS of £21,821 million for the same period. The lower net loss under US GAAP was mainly driven by higher amortisation charges of other intangible assets and share of result in equity method investments, more than offset by income taxes and the reversal of impairment losses.
The reconciliation of the differences between IFRS and US GAAP is provided in note 38 to the Consolidated Financial Statements.
of Key Performance Indicators
Financial Position and Resources