2008 Financial Year Compared to the 2007 Financial Year
EMAPA
Adjusted operating profit
Adjusted operating profit increased by 15.0% for the year ended 31 March 2008, or 20.9% on an organic basis, due to strong performances in Romania, Vodacom, Egypt and Verizon Wireless.
The table below sets out the reconciliation between reported and organic growth, showing the effect of acquisitions, disposals and exchange rate movements on adjusted operating profit:
| Organic growth % | Impact of exchange rates Percentage points |
Impact of acquisitions and disposals(1) Percentage points |
Reported growth % | |
|---|---|---|---|---|
| Adjusted operating profit | ||||
| Eastern Europe | 21.2 | (12.9) | 72.1 | 80.4 |
| Middle East, Africa and Asia | 13.3 | (4.5) | 2.0 | 10.8 |
| Pacific | 4.6 | 9.2 | – | 13.8 |
| EMAPA | 20.9 | (5.4) | (0.5) | 15.0 |
| Note: | |
|---|---|
| (1) | Impact of acquisitions and disposals includes the impact of the change in consolidation status of Bharti Airtel from a joint venture to an investment in February 2007. |
The acquisitions in Turkey and India led to a rise in acquired intangible asset amortisation, which reduced the reported growth in adjusted operating profit, while the continued investment in network infrastructure in the region resulted in higher depreciation charges. Reported growth in adjusted operating profit was also impacted by the disposals of Belgacom Mobile S.A. and Swisscom Mobile A.G. in the 2007 financial year.
Eastern Europe
Adjusted operating profit increased by 80.4%, or by 21.2% on an organic basis, with the main contributors being Turkey and Romania. The organic increase in adjusted operating profit was driven by growth in service revenue, offsetting the impact of the higher cost base, particularly an organic increase in interconnect costs and operating expenses of 7.5% and 5.7%, respectively. Depreciation and amortisation increased by 16.0% on an organic basis, primarily due to continued investment in network infrastructure, as well as network expansion into rural areas and increased 3G capacity to support data offerings in Romania.
Turkey generated strong growth in adjusted operating profit, assuming the Group owned the business for the whole of both periods, driven by the increase in revenue. The closing customer base grew by 21.8% following additional investment in customer acquisition activities, with the new connections in the year driving the higher acquisition costs. Other direct costs were up, mainly due to ongoing regulatory fees which equate to 15% of revenue. Operating expenses remained constant as a percentage of service revenue but increased following continued investment in the brand and network in line with the acquisition plan. There was also a decrease in acquired intangible asset amortisation, following full amortisation of the acquired brand by March 2007 as a result of the rebranding to Vodafone.
Romania’s adjusted operating profit grew by 31.4%, or 37.7% at constant exchange rates, with increases in costs being mitigated by service revenue performance. Interconnect costs grew by 24.7%, or 29.4% at constant exchange rates, reflecting the 18.3% rise in the average customer base. As a percentage of service revenue, acquisition and retention costs increased by 0.7% to 13.3% as a result of the increased competition for customers. Increases in the number of direct sales and distribution employees, following the market trend towards direct distribution channels, led to a 6.6% increase in operating expenses, or 11.0% at constant exchange rates, while depreciation charges rose by 23.0%, or 27.6% at constant exchange rates, due to network development to support 3G data offerings and to increase network coverage in the rural areas.
Middle East, Africa and Asia
Adjusted operating profit rose by 10.8%, or 13.3% on an organic basis, with the acquisition of Vodafone Essar and strong performances in Egypt and Vodacom being the main factors for the reported increase. The main organic movements in the cost base were in relation to other direct costs and operating expenses, which increased by 38.0% and 23.4%, respectively. Depreciation and amortisation increased by 36.3% on an organic basis, primarily due to enhancements in the network in Egypt in order to increase capacity and support 3G offerings. In addition, the expansion of the network in India, where approximately 1,950 base stations have been constructed per month since acquisition, increased reported depreciation.
The Indian mobile market continued to grow, with penetration reaching 23% by the end of March 2008. Vodafone Essar, which successfully adopted the Vodafone brand in September 2007, continued to perform well, with adjusted operating profit slightly ahead of the expectations held at the time of the completion of the acquisition. This was partially due to the Group’s rapid network expansion in this market together with improvements in operating expense efficiency, particularly in customer care. The outsourcing of the IT function was implemented during January 2008 and is expected to lead to the faster roll out of more varied services to customers, while delivering greater cost efficiencies.
In December 2007, the Group announced, alongside Bharti Airtel and Idea Cellular Limited, the creation of an independent tower company, Indus Towers Limited, to accelerate the expansion of network infrastructure in India, to reduce overall costs and generate revenue from third party tenants.
In Egypt, adjusted operating profit increased by 6.3%, or 10.1% at constant exchange rates. Interconnect costs grew by 41.8%, or 46.2% at constant exchange rates, in line with the growth in outgoing revenue, with other direct costs rising by 48.1%, or 52.4% at constant exchange rates, due to prepaid airtime commission increases and 3G licence costs, both of which were offset by the rise in revenue. Within operating expenses, staff investment programmes, higher publicity costs and leased line costs increased during the year, although operating expenses remained stable as a percentage of service revenue.
Vodacom’s adjusted operating profit rose by 11.8%, or 19.1% at constant exchange rates. The main cost drivers were operating expenses, which increased by 10.8%, or 19.2% at constant exchange rates, and other direct costs which grew by 13.9%, or 22.3% at constant exchange rates, primarily as a result of increased prepaid airtime commission following the growth of the business. Growth at constant exchange rates was in excess of reported growth as Vodacom’s reported performance in the 2008 financial year was impacted by the negative effect of exchange rates arising on the translation of its results into sterling.
Pacific
Adjusted operating profit in the Pacific rose by 13.8%, or 4.6% at constant exchange rates. A favourable performance in Australia was a result of the higher contract customer base, achieved through expansion of retail distribution, with higher contract revenue offsetting the increase in customer acquisition costs of 36.8%, or 27.6% at constant exchange rates.
Associates
| 2008 | 2007 | Verizon Wireless change | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Verizon Wireless £m |
Other(1) £m |
Total £m |
Verizon Wireless £m |
Other(1) £m |
Total £m |
£ % |
$ % |
|||
| Share of result of associates | ||||||||||
| Operating profit | 2,771 | – | 2,771 | 2,442 | 167 | 2,609 | 13.5 | 20.3 | ||
| Interest | (102) | – | (102) | (179) | 2 | (177) | (43.0) | (39.3) | ||
| Tax | (166) | – | (166) | (125) | (39) | (164) | 32.8 | 41.0 | ||
| Minority interest | (56) | – | (56) | (61) | – | (61) | (8.2) | (1.8) | ||
| 2,447 | – | 2,447 | 2,077 | 130 | 2,207 | 17.8 | 24.8 | |||
| Verizon Wireless (100% basis) | ||||||||||
| Total revenue (£m) | 22,541 | 20,860 | 8.1 | 14.5 | ||||||
| Closing customers (’000) | 67,178 | 60,716 | ||||||||
| Average monthly ARPU ($) | 53.9 | 52.5 | ||||||||
| Blended churn | 14.7% | 13.9% | ||||||||
| Messaging and data as a percentage of service revenue | 19.8% | 14.4% | ||||||||
| Note: | |
|---|---|
| (1) | Other associates in 2007 include the results of the Group’s associated undertakings in Belgium and Switzerland until the announcement of their disposal in August 2006 and December 2006, respectively. |
Verizon Wireless increased its closing customer base by 10.6% in the year ended 31 March 2008, adding 6.5 million net additions to reach a total customer base of 67.2 million. The performance was particularly robust in the higher value contract segment and was achieved in a market where the estimated mobile penetration reached 88% at 31 March 2008.
The strong customer growth was achieved through a combination of higher gross additions and Verizon Wireless’ strong customer loyalty, with the latter evidenced through continuing low levels of churn. The 12.3% growth in the average mobile customer base combined with a 2.7% increase in ARPU resulted in a 15.2% increase in service revenue. ARPU growth was achieved through the continued success of non-voice services, driven predominantly by data cards, wireless email and messaging services. Verizon Wireless’ operating profit was impacted by efficiencies in other direct costs and operating expenses, partly offset by a higher level of customer acquisition and retention costs.
During the 2008 financial year, Verizon Wireless consolidated its spectrum position through the Federal Communications Commission’s Auction 73, winning the auction for a nationwide spectrum footprint plus licences for individual markets for $9.4 billion, which will be fully funded by debt. This spectrum depth will allow Verizon Wireless to continue to grow revenue, to preserve its reputation as the nation’s most reliable wireless network, and to continue to lead in data services to satisfy the next wave of services and consumer electronics devices.
The Group’s share of the tax attributable to Verizon Wireless for the year ended 31 March 2008 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.
Investments
China Mobile, in which the Group has a 3.21% stake and which is accounted for as an investment, increased its closing customer base by 24.0% in the year to 392.1 million. Dividends of £72 million were received by the Group in the 2008 financial year.