2007 Financial Year Compared to the 2006 Financial Year
EMAPA
Adjusted operating profit
The impact of acquisitions, disposal and exchange rates on adjusted operating profit is shown below.
| Organic growth % | Impact of exchange rates Percentage points |
Impact of acquisitions and disposal(1) Percentage points |
Reported growth % | |
|---|---|---|---|---|
| Adjusted operating profit | ||||
| Eastern Europe | 49.2 | (7.6) | (37.1) | 4.5 |
| Middle East, Africa and Asia | 18.5 | (16.9) | 31.1 | 32.7 |
| Pacific | 25.4 | (11.8) | – | 13.6 |
| EMAPA | 27.4 | (8.7) | (1.3) | 17.4 |
| Note: | |
|---|---|
| (1) | Impact of acquisitions and disposal includes the impact of the change in consolidation status of Bharti Airtel from a joint venture to an investment. |
Adjusted operating profit increased by 17.4%. On an organic basis, growth was 27.4%, as the acquisitions and stake increases led to the rise in acquired intangible asset amortisation reducing reported growth in operating profit. These acquisitions, combined with the continued expansion of network infrastructure in the region, including 3G and HSDPA upgrades, resulted in higher depreciation charges. Organic growth in adjusted operating profit was driven by a strong performance in Romania, Egypt, South Africa and the Group’s associated undertaking in the US.
Eastern Europe
Interconnect costs increased by 46.3%, or 23.8% on an organic basis, principally as a result of the higher usage in Romania. An ongoing regulatory fee in Turkey amounting to 15% of revenue increased other direct costs compared to the 2006 financial year.
Acquisition costs fell as a percentage of service revenue throughout most of Eastern Europe, with increased investment in the direct distribution channel in Romania resulting in lower subsidies on handsets. Retention costs decreased as a percentage of service revenue, but increased on an organic basis due to a focus on retaining customers through loyalty programmes in response to the increasing competition in Romania, which had a positive impact on contract and prepaid churn.
Operating expenses increased by 1.0 percentage point as a percentage of service revenue, primarily as a result of inflationary pressures in Romania and investment in Turkey.
Middle East, Africa and Asia
Interconnect costs increased by 45.0%, or 26.8% on an organic basis, due to the usage stimulation initiatives throughout the region.
Acquisition costs remained stable as a percentage of service revenue, while retention costs increased, principally due to increased investment in retaining customers in Egypt ahead of the launch of services by a new operator after 31 March 2007 and in South Africa in response to the introduction of mobile number portability during the 2007 financial year, with the provision of 3G and data enabled device upgrades for contract customers and a loyalty point scheme. Operating expenses remained stable as a percentage of service revenue.
Pacific
The improved profitability in Australia was more than offset by the lower profitability in New Zealand resulting from the increased cost of telecommunications service obligation regulation, the impact of the acquisition of ihug and adverse foreign exchange rates.
Acquisition and retention costs increased as a percentage of service revenue due to the investment in higher value customers in Australia, which also had a favourable impact on contract churn and were partially offset by savings in network costs and operating expenses.
Associates
| 2007 | 2006 | Verizon Wireless change | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Verizon Wireless £m |
Other £m |
Total £m |
Verizon Wireless £m |
Other £m |
Total £m |
£ % |
$ % |
|||
| Share of result of associates | ||||||||||
| Operating profit | 2,442 | 167 | 2,609 | 2,112 | 263 | 2,375 | 15.6 | 22.9 | ||
| Interest | (179) | 2 | (177) | (204) | 1 | (203) | (12.3) | (7.0) | ||
| Tax | (125) | (39) | (164) | (116) | (72) | (188) | 7.8 | 14.6 | ||
| Minority interest | (61) | – | (61) | (60) | – | (60) | 1.7 | 6.7 | ||
| 2,077 | 130 | 2,207 | 1,732 | 192 | 1,924 | 19.9 | 27.6 | |||
| Verizon Wireless (100% basis) | ||||||||||
| Total revenue (£m) | 20,860 | 18,875 | 10.5 | 17.4 | ||||||
| Closing customers (’000) | 60,716 | 53,020 | ||||||||
| Average monthly ARPU ($) | 52.5 | 51.4 | ||||||||
| Blended churn | 13.9% | 14.7% | ||||||||
| Messaging and data as a percentage of service revenue | 14.4% | 8.9% | ||||||||
Verizon Wireless produced another year of record growth in organic net additions, increasing its customer base by 7.7 million in the year ended 31 March 2007. The performance was particularly robust in the higher value contract segment and was achieved in a market where the estimated closing mobile penetration reached 80%.
The strong customer growth was achieved through a combination of higher gross additions and improvements in Verizon Wireless’ customer loyalty, with the latter evidenced through lower levels of churn. The 15.4% growth in the average mobile customer base combined with a 2.1% increase in ARPU resulted in a 17.8% increase in service revenue. ARPU growth was achieved through the continued success of data services, driven predominantly by data cards, wireless email and messaging services. Verizon Wireless’ operating profit also improved due to efficiencies in other direct costs and operating expenses, partly offset by a higher level of customer acquisition and retention activity.
Verizon Wireless continued to lay the foundations for future data revenue growth through the launch of both CDMA EV-DO Rev A, an enhanced wireless broadband service, and broadcast mobile TV services during the first calendar quarter of 2007. In addition, Verizon Wireless consolidated its spectrum position during the year with the acquisition of spectrum through the Federal Communications Commission’s Advanced Wireless Services auction for $2.8 billion.
The Group’s share of the tax attributable to Verizon Wireless for the year ended 31 March 2007 relates only to the corporate entities held by the Verizon Wireless partnership. The tax attributable to the Group’s share of the partnership’s pre-tax profit is included within the Group tax charge.
The Group’s other associated undertakings in EMAPA have been impacted by intense competition and reduction in termination rates, similar to the experiences of the Group’s controlled businesses in the Europe region, which have had a negative impact on revenue. The Group disposed of its associated undertakings in Belgium and Switzerland on 3 November 2006 and 20 December 2006, respectively, for a total cash consideration of £3.1 billion. Results are included until the respective dates of the announcement of disposal.