Vodafone Group 6-K 2005
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rules 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
Dated November 16, 2005
PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
VODAFONE HOUSE, THE CONNECTION, NEWBURY, BERKSHIRE,
RG14 2FN, ENGLAND
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
If Yes is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82_______________
This Report on Form 6-K contains a press release issued by Vodafone Group Plc on November 15, 2005, entitled VODAFONE ANNOUNCES RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2005.
Robust financial performance:
Group revenue of £18.3 billion. Mobile telecommunications revenue increased to £17.7 billion, with organic growth(1) of 5.8%
Adjusted basic earnings per share(1) increased by 8.5% to 5.37 pence. Basic earnings per share were 4.36 pence. Profit before taxation for the period was £4.1 billion after an impairment charge of £0.5 billion
Free cash flow(1) of £3.7 billion. Net cash inflow from operating activities, after net taxation paid of £0.7 billion, up 4.4% to £6.1 billion
Investment in customer growth:
Net organic proportionate additions of 10.0 million for the period
Closing proportionate customer base of 171.0 million, representing annualised organic growth of 12.9%
Continuing strong take-up of products and services:
Total 3G devices of over 4.9 million at the period end, including 4.5 million consumer devices
Mobile voice usage increased by 17.0% to 95.6 billion minutes and non-messaging data revenue grew by 29.6% to £1 billion
Substantial increase in returns to shareholders:
Interim dividend per share increased by 15%, to 2.20 pence, giving a pay-out of approximately £1.4 billion. Targeting a 50% dividend pay-out ratio for the year ending 31 March 2007
Increasing share purchase target by £2 billion to £6.5 billion for the year to March 2006. Since 1 April, £3.4 billion has been expended, reducing shares in issue by 3.7%
(1) See page 62 for definition of terms and page 61 for use of non-GAAP financial information.
Arun Sarin, Chief Executive, commented:
I am pleased to announce another strong set of results. We have grown our customer base to 171 million and made good progress on 3G and other global products and services. We continue to outperform our competitors in most of our markets as we leverage our global scale and remain focused on delivering our strategy for growth. The Board is pleased to announce a substantial increase in returns to shareholders.
CHIEF EXECUTIVES STATEMENT
Vodafone Group has posted another good set of results for the first half of this financial year, underpinned by a strong operational performance.
The main feature of the last six months has been the success our businesses have enjoyed in acquiring and retaining customers. Our Group added 10 million net organic proportionate mobile customers in the first half, representing annualised growth of approximately 13%. The total proportionate customer base of the Group has risen to 171 million as we continue to enjoy success in both low and high penetration markets.
Our focus on customers can also be seen in the continued and accelerating growth of our 3G customer base. Our early push for 3G is delivering real benefits and we now have approximately 5 million devices. Across the markets where we have introduced the benefits of W-CDMA, I continue to believe that 3G offers Vodafone, and indeed the mobile industry, significant opportunities for growth in the future.
We are now also seeing the benefits of scale introduced into the 3G world. Handset prices to Vodafone have reduced by around 30% in the last 12 months and continued improvements in functionality are all helping to deliver 3G as a mass market proposition. The Vodafone 3G service offering also continues to develop, with a major push in both music and mobile TV which will be enhanced by the rollout of HSDPA next year. I am excited about the prospects for these adjacent markets and our ability to drive new revenue streams.
In light of our financial performance, we are reiterating our guidance ranges for the full year. At this stage in the year we see the likely organic proportionate mobile revenue growth to be in the middle of the 6 to 9% range we indicated in May and organic proportionate mobile EBITDA margins to be at the lower end of the flat to minus 1% range.
The key trends in our business are reflected through our major geographies. First, our core European footprint is delivering solid growth and broadly flat margins. Given the competitive intensity of the European markets and our continued push for new customers, including 3G customers which tend to have a higher upfront subsidy and higher ARPUs, this is excellent progress.
In Japan, execution of our turn-around is on track and I am pleased with the progress we are making. One of the key aspects of this programme is that we continue to invest in customers. The EBITDA margin declined six percentage points year on year in the first half, which together with the effects of stake changes a year ago, contributed the majority of the 1.5 percentage point fall in the total mobile proportionate EBITDA margin.
In the US, our associate, Verizon Wireless, continues to lead the market for customer additions. This has led to continued strong double digit service revenue growth, with some associated margin impact. Given the development of the US market and market leading position enjoyed by Verizon Wireless, we are supportive of this strategy.
The Group continues to benefit from global scale. Our One Vodafone implementation is now ramping up to ensure we can deliver full benefits from the 2008 financial year. The differentiated customer propositions we have introduced in the last 12 months are delivering value to our customers. A very good example of utilising our scale is the introduction of Vodafone Passport, which today is used by over 3 million customers across the Vodafone footprint. Shareholders should expect us to continue to leverage our unrivalled scale in the future.
Inorganic growth is also a factor in our longer term development. This year we have announced acquisitions in Romania, the Czech Republic, India and South Africa as well as the disposal of our Swedish business. We will continue to focus on selective acquisitions and these recent announcements highlight our strategy of investing in growth markets.
The Board has approved a 15% increase in the interim dividend to 2.20 pence per share. The Board has also indicated that it is targeting a 50% dividend pay-out ratio to be achieved for the 2007 financial year. Having taken into account the target of a 50% pay-out, growth in future dividends is expected to be in line with underlying earnings growth.
The Board has also approved a £6.5 billion share purchase programme target for this financial year, representing an increase of £2 billion on the £4.5 billion target announced in May. The Board will continue to review the appropriate allocation of capital on an ongoing basis.
Vodafone Group continues to prosper in a competitive and challenging environment. I am very satisfied with progress and believe that the Group is uniquely placed to take advantage of the many opportunities to deliver shareholder value in the future.
GROUP FINANCIAL AND OPERATING HIGHLIGHTS
See page 62 for definition of terms
(1) These measures are stated excluding items not related to underlying business performance. See page 39 for a description of items not related to underlying business performance
(2) Cumulative number at 30 September
(3) Figures represent 100% of subsidiary information and a pro-rata share in joint ventures
(4) With effect from 31 December 2004, Vodafone live! active devices in Japan have been included in the Group total as the service in Japan has become aligned with the Vodafone live! experience in other countries
(5) Following a review of certain tariffs in Japan, the Group has reclassified an element of monthly fees received from contract customers from voice revenue to non-voice revenue to provide a more precise reflection of customer usage in the six months ended 30 September 2004. Further details are provided on page 6
GROUP PROPORTIONATE INFORMATION
Please see Forward-Looking Statements on page 60 and definition of terms on page 62.
Where not explicitly stated on an organic basis, these expectations include the impact of the acquisition of interests in MobiFon in Romania and Oskar in the Czech Republic, but exclude the impact of recently announced transactions in India, Sweden and South Africa as their completion is subject to certain conditions.
For the year ending 31 March 2006 (2006 financial year)
The Group expects to deliver organic growth in proportionate mobile revenue in the middle of the 6% to 9% range previously indicated.
Continuing investment in customer growth is expected to result in the organic proportionate mobile EBITDA margin being at the lower end of the flat to 1 percentage point lower range when compared to the 2005 financial year. The expected fall in the proportionate mobile EBITDA margin includes a decline in the year on year EBITDA margin for Vodafone Japan for the full year similar to that experienced in the first half of the year.
Group capitalised fixed asset additions are anticipated to be in the £5.0 billion to £5.4 billion range, including expenditure in Romania and the Czech Republic.
The Group continues to expect free cash flow to be within the £6.5 billion to £7.0 billion range previously indicated, including free cash flow from Romania and the Czech Republic.
Share purchases by the Group are targeted to be approximately £6.5 billion.
For the year ending 31 March 2007 (2007 financial year)
The following is a summary of the key trends expected for the 2007 financial year.
The Group will continue to focus on growing its operations and outperforming its competitors. Whilst strong revenue growth is expected from 3G enabled data products it is likely that the overall rate of increase in proportionate mobile revenue on an organic basis will be slightly lower than that anticipated for the 2006 financial year due to both progressively higher levels of mobile penetration and a greater impact from changes in termination rates.
The Group expects to exploit opportunities to grow its customer and revenue base and consequently envisages a small decline in proportionate mobile EBITDA margins outside Japan as the benefit of efficiencies in payroll and other operating expenses arising from the One Vodafone programme are more than offset by additional investments in customer growth and changes in termination rates.
In Japan, the Group remains confident that the ongoing improvements to its handset range and the accelerated build out of its 3G network will enable Vodafone Japan to increase its share of the markets overall growth in customers in the 2007 financial year. It is expected that the costs of funding this anticipated growth and the opportunities presented by the introduction of mobile number portability are likely to cause a further significant reduction in EBITDA margin in the 2007 financial year as the Group seeks to re-build momentum in the business.
Group capitalised fixed asset additions, including those in Romania and the Czech Republic, are likely to be slightly higher than in the 2006 financial year, with further investment in 3G coverage and commencement of the Groups rollout of HSDPA.
The effective tax rate for the year is expected to increase by a similar amount to that anticipated for the full 2006 financial year due to a reduced level of one-off restructuring opportunities. It is also expected that there will be a significant increase in cash tax payments as a number of long standing tax issues are expected to reach resolution.
As a result of the above factors, the Group expects free cash flow to be lower than that anticipated for the 2006 financial year.
A detailed outlook, including the impact of the recently announced transactions in India, Sweden and South Africa, will be provided with the preliminary announcement of results for the 2006 financial year in May 2006.
Total revenue increased by 9.0% to £18,251 million for the six months ended 30 September 2005, comprising organic growth of 6.4%, favourable movements in exchange rates of 1.4%, primarily from the Euro, and a further 1.2% from the acquisitions in the Czech Republic and Romania.
Adjusted operating profit increased by 4.5% to £4,973 million, with underlying organic growth of 3.9%, following organic growth of 3.7% in the Groups mobile business. Favourable exchange rate movements benefited reported growth for the Group by 1.3% whilst the impact of acquisitions reduced reported growth by 0.7%, principally due to the amortisation of intangible assets resulting both from the acquisitions in the current period and the increase in the Groups effective shareholding in Japan in the prior period. The Group recorded an impairment charge to the carrying value of goodwill in Vodafone Sweden of £515 million to reflect the recoverable amount at 30 September 2005. This was the primary driver in the reduction in operating profit to £4,477 million, a decrease of 5.9% on the prior period.
MOBILE TELECOMMUNICATIONS RESULTS
Revenue in the mobile business increased by 8.5%, or 5.8% on an organic basis, for the six months to 30 September 2005 due to a 5.4% increase in service revenue on an organic basis and growth in other revenue. Service revenue growth reflected a 12.4% organic increase in the average customer base of the controlled mobile networks and the Groups share of jointly controlled mobile networks, offset by a decline in ARPU in a number of markets following termination rate cuts, tariff adjustments in response to increased competition and a higher proportion of lower spending prepaid customers across the Group.
Voice revenue grew by 7.0%, or by 3.9% on an organic basis, with improvements in revenue from outgoing and roaming traffic offset by a decline in incoming revenue driven by termination rate cuts in several markets. Total voice minutes increased by 17.0%, driven by a larger customer base and the success of usage stimulation initiatives. These factors, counterbalanced by tariff declines, resulted in growth in outgoing revenue. Roaming revenue benefited from the launch of Vodafone Passport in the current period.
An increase of 29.6% in non-messaging data revenue, to £989 million, was the principal driver in the growth of non-voice service revenue to £2,936 million for the six months to 30 September 2005, a 12.2% increase on an organic basis. Registering an additional 2,740,000 3G devices in the last six months, including 188,000 Vodafone Mobile Connect 3G/GPRS data cards, was the main factor in the non-messaging data revenue growth, along with Vodafone live! for consumers and BlackBerry® from Vodafone in the business segment. Messaging revenue continued to represent the largest component of non-voice revenue at £1,947 million for the current period, an 8.6% increase over the prior period.
Other revenue increased to £2,059 million, principally due to growth in revenue related to acquisition and retention activities in Spain and Japan. A 27.8% 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 23.3% increase in the number of upgrades, at a higher average price as customers upgraded to high-specification 3G handsets, led to a 12.9% growth in revenue related to acquisition and retention activities to £1,800 million.
Adjusted operating profit
Adjusted operating profit increased by 4.3% to £4,952 million, comprising organic growth of 3.7% and favourable exchange rate movements of 1.4% offset by the impact of acquisitions in the current and prior periods.
Interconnect costs increased by 6.2% on an organic basis, as strong growth in voice usage was only 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.
Acquisition and retention costs, net of attributable revenue, grew by 16.5% to £2,221 million, principally due to increased investment in retention activities, with Japan representing the largest element, as the number of upgrades grew strongly with a marginally higher average subsidy per upgrade.
Payroll and other operating expenses as a percentage of service revenue decreased from 23.7% to 22.9% as the Group continued to realise cost efficiencies.
The charge relating to the amortisation of acquired intangible assets increased to £120 million following the acquisitions in the Czech Republic and Romania in the current period and the increase in the Groups effective shareholding in Japan in the prior period. Depreciation and other amortisation increased principally due to acquisitions in the current period and the ongoing expansion of 3G networks.
The Groups share of the result in associated undertakings, before items not related to underlying business performance, grew by 9.3% after the deduction of interest, tax and minority interest, and 8.5% before the deductions, primarily due to growth at SFR in France. The Groups share of the result in Verizon Wireless increased by 5.9% to £952 million, before deduction of interest, tax and minority interest.
MOBILE TELECOMMUNICATIONS REVIEW OF OPERATIONS
Vodafone operating companies are licensed on an arms length basis to use the Vodafone brand and related trademarks. These arrangements have been reviewed and the charges for the use of the Vodafone brand and related trademarks were revised with effect from 1 April 2005 to reflect the positioning of the brand in the current markets. There is no material impact on the Groups overall operating profit or EBITDA margin. The impact of the change is to reduce individual operating company margins by up to 1.1 percentage points, depending on the operating company, with a corresponding increase in the profit attributable to the Common functions segment, which forms part of the mobile telecommunications business.
Vodafone achieved strong customer growth in a competitive market, consolidated its market position in 3G offerings with innovative new products, including Mobile TV, and launched Vodafone Zuhause, an alternative to a fixed line network allowing private householders and home office users to replace their existing fixed line connection. In September 2005, Vodafone launched 3G services for prepaid customers and commenced customer trials of High Speed Downlink Packet Access (HSDPA) technology which enables data transmission speeds of up to 2 megabits per second.
Total revenue grew by 2.0%, when measured in local currency, due to a 3.0% increase in service revenue, primarily driven by a larger customer base, partly offset by lower other revenue. Competitively priced prepaid offerings including new text packages and tariff options for evening and weekend calls, selective top-up promotions and a new internet-only low cost tariff along with the success of 3G, new voice bundles and the launch of Vodafone Zuhause, led to growth in the average customer base of 8.7% compared with the comparative period. New voice bundles, which had attracted more than 4 million customers at 30 September 2005, were the main factor in the 11.1% increase in voice usage by contract customers and contributed to the 0.9 percentage points fall in contract churn to 13.7% for the period. A rise in the number of lower spending prepaid customers along with a fall in activity level and a cut in the mobile call termination rate from 14.3 eurocents to 13.2 eurocents in the second half of the previous financial year had a dilutive effect on ARPU, and particularly impacted service revenue growth in the second quarter, whilst growth in the first quarter benefited from the timing of Easter holidays compared to the prior period.
Non-voice service revenue increased by 16.7% in local currency compared to the six months to 30 September 2004, primarily due to the success of non-messaging data offerings, the revenue from which increased by 75.4% in local currency, to £117 million. Vodafone continued to lead the 3G market in Germany with 815,000 registered 3G devices on the network at 30 September 2005, including 148,000 Vodafone Mobile Connect 3G/GPRS data cards. In the consumer segment, the number of active Vodafone live! devices increased by 13.7% over the six month period to 5,508,000 at 30 September 2005.
Investment in customer retention and an increase in the Groups charge for the use of the brand and related trademarks, representing 1.1 percentage points of the change in EBITDA margin and reported in other operating expenses, led to a decrease in EBITDA margin of 0.5 percentage points to 46.4%. Interconnect costs rose broadly in line with service revenue as an 8.9% increase in total voice usage was partially offset by the termination rate cut. A higher proportion of new 3G customers, as discussed above, and a 9.2% rise in gross customer additions led to an increase of 5.5% in net acquisition costs, in local currency. Adjusted operating profit was impacted by increased depreciation charges resulting from the ongoing 3G network roll out and the disposal of assets due to the standardisation of network equipment.
In an intensely competitive market, Vodafone continued to perform strongly in Italy through customer growth, driven by successful summer promotions, and a focus on high value customers. Average customer growth of 6.5% was achieved despite market penetration levels well in excess of 100% due to customers having more than one SIM.
In local currency, total revenue increased by 5.3%, reflecting the growth in service revenue achieved from an increase in the average customer base. This was partially offset by a slight decrease in ARPU following a cut in termination rates averaging 20.5% from 1 September 2005 which impacted service revenue growth and interconnect costs in the second quarter. Strong promotional initiatives over the summer, comprising free calls and text messages for a small activation fee, were taken up by more than 4 million customers and stimulated voice and text usage. Total voice usage increased by 5.5% compared with the six months to 30 September 2004, with a higher proportion of voice minutes from calls between Vodafone customers, which do not result in interconnect costs. Targeted retention activities and a focus on high value customers led to a reduction in contract customer churn to 14.7% from 18.0% for the prior period and limited the increase in total churn, which rose over the prior period by 1.6 percentage points to 18.0%. In the business segment, the positive net customer inflow from mobile number portability continued, reflecting the attractiveness of its business offerings, including products such as the Vodafone Mobile Connect data card and Vodafone Passport.
Non-voice service revenue increased by 18.9% in local currency, with revenue from messaging increasing to £297 million, representing growth of 15.4% in local currency. Non-messaging data revenue grew by 48.7% driven by the success of 3G offerings and a 124.2% increase in the Groups share of the number of active Vodafone live! devices over the past twelve months. At 30 September 2005, the Groups share of registered 3G devices was 1,044,000 compared with 511,000 at 31 March 2005.
The EBITDA margin grew by 0.4 percentage points to 53.9%, despite an increase in the cost of acquiring and retaining customers in response to competitive pressures, though these costs remain low as a percentage of service revenue compared to other markets, and higher operating expenses from increased marketing and network costs as 3G network coverage continued to improve. In local currency, adjusted operating profit increased by 7.5% due to the same factors.
Market conditions for Vodafone in Japan continue to be challenging. Vodafone is in the process of returning to customer growth through more competitive services and pricing coupled with an improving 3G network and handset range, most recently demonstrated by the announcement of improvements to the handset range for the winter sales period.
In local currency, revenue decreased marginally by 0.4% as the increase in equipment revenue related to acquisition and retention activities was offset by a 5.0% reduction in service revenue. The decrease in service revenue followed a decline in ARPU and a slight decline in the average customer base. The loss of higher value customers, following a lack of a competitive 3G offering, and the total ban on using mobile phones whilst driving introduced in November 2004, led to the reduction in ARPU. The revenue uplift from the introduction of new tariffs in the second quarter of the prior period has not been replicated in the current period. Revenue related to acquisition and retention activities improved by 19.2% in local currency due to increased sales of higher specification handsets, particularly from retention activities, which outweighed lower gross connections.
New flat rate messaging and data tariffs improved the competitiveness of the non-voice offerings and were a significant contributory factor in an additional 816,000 3G devices being registered to the network in the six months to 30 September 2005, bringing the total to 1,614,000. Non-voice revenue decreased by 1.8% in local currency, to £815 million, as the growth in non-messaging data was offset by the loss of higher value customers. Non-messaging data revenue increased by 12.4% in local currency, to £615 million for the six months to 30 September 2005, resulting from higher usage of data products and services and the fact that messaging transmitted via the 3G network is reported as data revenue in Japan as 3G messages are packet-based.
Investment in customer retention in response to competitive pressures contributed to a reduction in customer churn from 23.1% for the six months to September 2004 to 19.7% for the current period and, along with the dilution of ARPU and higher direct costs resulting from lower provisions for slow moving handset stocks in the comparative period, led to the EBITDA margin falling 6.0 percentage points to 21.7%. These factors were partially offset by a reduction in gross connections leading to lower net acquisition costs. Adjusted operating profit was impacted by the factors above and an increase in the amortisation of acquired intangible assets recognised following the Groups increase in its effective shareholding in Japan in the six months ended 30 September 2004.
On 9 November 2005, the government of Japan awarded two licences for 1.7GHz and one licence for 2.0 GHz spectrum to potential new mobile market entrants. These licences carry obligations to deploy national coverage within an allocated time frame. The new market entrants are expected to start limited service from late 2006.
Vodafone continued to deliver strong growth in Spain through a focus on customer growth, targeted summer campaigns and excellent customer service, as well as the retention of high value customers, alongside propositions encouraging both customer transition from prepaid to contract and increased voice usage.
In local currency, total revenue for the six months to 30 September 2005 increased by 24.6%, principally as a result of a 24.0% rise in service revenue. The average customer base grew by 18.8% owing to 1,967,000 new customers from the successful summer campaign and attractive tariffs combined with a successful customer retention strategy and net inflow of customers from mobile number portability. Additionally, a continuing campaign encouraging customers to switch from prepaid to contract helped the percentage of contract customers increase from 45.4% at 30 September 2004 to 48.0% at 30 September 2005. Growth of 38.0% in voice usage, driven by promotions, a larger customer base and a higher proportion of contract customers, resulted in a 4.5% increase in ARPU, despite a 10.5% cut in termination rates in November 2004.
Non-voice service revenue increased by 37.1%. Promotions encouraging usage resulted in text message volumes increasing by 26.6% in the six months to 30 September 2005. Although messaging remains the principal driver for the rise in non-voice service revenue, non-messaging data revenue continues to increase its share of non-voice service revenue, increasing by 85.7% in local currency to £46 million. This is driven by the success of 3G services, with 315,000 devices registered by 30 September 2005, and Vodafone live!, which has 4,132,000 devices using the service.
The EBITDA margin for the six months to 30 September 2005 increased by 1.3 percentage points compared to the prior period, excluding an increase in the Group charge for use of the brand and related trademarks which resulted in a 1.1 percentage point fall in EBITDA margin. Both acquisition costs and interconnect costs fell as a proportion of service revenue, the latter due to the cut in termination rates combined with promotions focusing on calls to Vodafone and fixed-line numbers, which incur lower interconnect costs. These falls were counteracted by a 48.7% rise in net retention costs, which resulted from a focus on retaining customers and led to a reduction in churn levels from 23.0% for the six months to 30 September 2004 to 21.2% for the current period. Other direct costs increased 29.5%, primarily as a result of an increase in content provision costs arising from the increase in data traffic.