2007 Financial Year Compared to the 2006 Financial Year
Europe
Adjusted operating profit
Adjusted operating profit fell by 4.1%, or by 3.7% on an organic basis, with the disposal of the Group’s operations in Sweden being the main cause of the decline. The growth in operating expenses and other direct costs, including the charge in relation to a regulatory fine in Greece of £53 million, also had an adverse effect on adjusted operating profit.
Interconnect costs remained stable for the 2007 financial year, once the effect of the disposal of Sweden was excluded, with the increased outgoing call volumes to other networks offset by the cost benefit from the impact of the termination rate cuts.
Reported acquisition and retention costs for the region decreased by 2.5%, but remained stable on an organic basis, when compared to the 2006 financial year. In Spain, the main drivers of the increased costs were the higher volumes of gross additions and upgrades, especially with regard to the higher proportion of contract gross additions, which were achieved with higher costs per customer as competition intensified. In Italy, costs increased slightly due to an increased focus on acquiring high value contract customers and an increased volume of prepaid customers. In Germany, retention costs declined as the cost per upgrade was reduced and volumes slightly decreased. The UK saw a reduction in retention costs resulting from a change in the underlying commercial model with indirect distribution partners, where a portion of commissions are now recognised in other direct costs. Acquisition costs in Other Europe decreased, primarily as a result of lower gross contract additions in Greece and a reduction in cost per gross addition in the Netherlands.
Other direct costs increased by 14.9%, or by 16.7% on an organic basis, primarily caused by the regulatory fine in Greece and commissions in the UK discussed above. Arcor saw an increase in direct access charges primarily as a result of having a higher customer base.
Operating expenses increased by 4.2%, or by 7.4% on an organic basis, primarily caused by increased intercompany recharges, a result of the centralisation of data centre and service platform operations, which were offset by a corresponding reduction in depreciation expense, and a 14.3% increase in Spain’s operating expenses at constant exchange rates as a result of the growth in this operating company, but which only slightly increased as a percentage of service revenue. Increased publicity spend in the UK, Italy and Greece, and restructuring costs in Germany, the UK and Ireland, also adversely affected operating expenses during the 2007 financial year.
As many of the cost reduction initiatives are centralised in common functions, as described earlier, the Group’s target in respect of operating expenses for the total of the Europe region (excluding Arcor) includes common functions but excludes the developing and delivering of new services and business restructuring costs. On this basis, these costs grew by 3.5% in the 2007 financial year for the reasons outlined in the preceding paragraph.
Associates
SFR, the Group’s associated undertaking in France, achieved an increase of 3.5% in its customer base, higher voice usage and strong growth in data services. However, service revenue was stable at constant exchange rates as the impact of these items was offset by a 5.7% decline in ARPU due to the increase in competition and significant termination rate cuts imposed by the regulator. The voice termination rate was cut by 24% to 9.5 eurocents per minute with effect from 1 January 2006 and by a further 21% to 7.5 eurocents per minute with effect from 1 January 2007. France is the first European Union country to impose regulation on SMS termination rates, which were cut by 19% with effect from 1 January 2006 and a further 30% with effect from mid September 2006 to 3 eurocents per SMS.
Cost reduction initiatives
The Group has set targets in respect of operating expenses and capitalised fixed asset additions. The operating expense and capitalised fixed asset additions targets relate to the Europe region (excluding Arcor) and common functions in aggregate. During the 2007 financial year, the implementation of a range of Group wide initiatives and cost saving programmes commenced, designed to deliver savings in the 2008 financial year and beyond. The key initiatives were as follows:
- The application development and maintenance initiative focused on driving cost and productivity efficiencies through outsourcing the application development and maintenance for key IT systems. In October 2006, the Group announced that EDS and IBM had been selected to provide application development and maintenance services to separate groupings of operating companies within the Group. The initiative was in the execution phase in the 2007 financial year and was progressing ahead of plan, with a number of operating companies having commenced service with their respective vendors.
- The supply chain management initiative focused on centralising supply chain management activities and leveraging Vodafone’s scale in purchasing activities. Through the standardisation of designs and driving scale strategies in material categories, the Group aimed to increase the proportion of purchasing performed globally. The alignment of all objectives and targets across the entire supply chain management was completed during the 2007 financial year.
- The IT operations initiative created a shared service organisation to support the business with innovative and customer focused IT services. This organisation consolidated localised data centres into regionalised northern and southern European centres and consolidated hardware, software, maintenance and system integration suppliers to provide high quality IT infrastructure, services and solutions.
- The Group commenced a three year business transformation programme to implement a single integrated operating model, supported by a single enterprise resource planning (“ERP”) system covering human resources, finance and supply chain functions.
- The network team focused on network sharing deals in a number of operating companies, with the principal objectives of cost saving and faster network rollout.
- Many of the Group’s operating companies participated in external cost benchmarking studies and used the results to target local cost reductions. Initiatives implemented in the 2007 financial year included reductions to planned network rollout, outsourcing and off-shoring of customer services operations, property rationalisation, replacing leased lines with owned transmission, network site sharing and renegotiation of supplier contracts and service agreements.