Operating results
2008 financial year compared to the 2007 financial year
Europe(1)
| Germany | Italy | Spain | UK | Other | Eliminations | Europe | % change | |||
|---|---|---|---|---|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | £m | £m | £ | Organic | ||
| Year ended 31 March 2008 | ||||||||||
| Revenue | 6,866 | 4,435 | 5,063 | 5,424 | 4,583 | (290) | 26,081 | 6.1 | 2.0 | |
| Service revenue | 6,551 | 4,273 | 4,646 | 4,952 | 4,295 | (287) | 24,430 | 6.3 | 2.1 | |
| EBITDA | 2,667 | 2,158 | 1,806 | 1,431 | 1,628 | – | 9,690 | 3.1 | (0.1) | |
| Adjusted operating profit | 1,490 | 1,573 | 1,282 | 431 | 1,430 | – | 6,206 | 0.8 | (1.5) | |
| EBITDA margin | 38.8% | 48.7% | 35.7% | 26.4% | 35.5% | 37.2% | ||||
| Year ended 31 March 2007 | ||||||||||
| Revenue | 6,790 | 4,245 | 4,500 | 5,124 | 4,275 | (342) | 24,592 | |||
| Service revenue | 6,481 | 4,083 | 4,062 | 4,681 | 4,018 | (338) | 22,987 | |||
| EBITDA | 2,696 | 2,149 | 1,567 | 1,459 | 1,530 | – | 9,401 | |||
| Adjusted operating profit | 1,525 | 1,575 | 1,100 | 511 | 1,448 | – | 6,159 | |||
| EBITDA margin | 39.7% | 50.6% | 34.8% | 28.5% | 35.8% | 38.2% | ||||
Note:
- (1)
- The Group revised its segment structure during the year. See note 3 to the consolidated financial statements.
The Group’s strategy in the Europe region continued to drive additional usage and revenue from core mobile voice and messaging services and reduce the cost base in an intensely competitive environment where unit price declines are typical each year. The 2008 financial year saw a strong focus on stimulating additional usage by offering innovative tariffs, larger minute bundles, targeted promotions and focusing on prepaid to contract migration. Data revenue growth was strong throughout the region, mainly due to the higher take up of mobile PC connectivity devices. The Group’s ability to provide total communications services was enhanced through the acquisition of Tele2’s fixed line communication and broadband services in Italy and Spain in the second half of the year.
Revenue growth of 6.1% was achieved for the year ended 31 March 2008, comprising 2.0% organic growth, a 0.7 percentage point benefit from the inclusion of acquired businesses, primarily Tele2, and 3.4 percentage points from favourable movements in exchange rates, largely due to the strengthening of the euro against sterling.
The impact of merger and acquisition activity and exchange rate movements on revenue, service revenue, EBITDA and adjusted operating profit are shown below:
| Organic growth % |
M&A activity pps |
Foreign exchange pps |
Reported growth % |
|
|---|---|---|---|---|
| Revenue – Europe | 2.0 | 0.7 | 3.4 | 6.1 |
| Service revenue | ||||
| Germany | (2.9) | – | 4.0 | 1.1 |
| Italy | (2.0) | 2.6 | 4.1 | 4.7 |
| Spain | 8.1 | 1.6 | 4.7 | 14.4 |
| UK | 5.8 | – | – | 5.8 |
| Other | 2.4 | 0.3 | 4.2 | 6.9 |
| Europe | 2.1 | 0.8 | 3.4 | 6.3 |
| EBITDA | ||||
| Germany | (5.0) | – | 3.9 | (1.1) |
| Italy | (3.2) | (0.2) | 3.8 | 0.4 |
| Spain | 11.1 | (0.4) | 4.6 | 15.3 |
| UK | (1.9) | – | – | (1.9) |
| Other | 2.9 | (0.3) | 3.8 | 6.4 |
| Europe | (0.1) | (0.2) | 3.4 | 3.1 |
| Adjusted operating profit | ||||
| Germany | (6.0) | – | 3.7 | (2.3) |
| Italy | (1.4) | (2.4) | 3.7 | (0.1) |
| Spain | 14.4 | (2.2) | 4.3 | 16.5 |
| UK | (15.7) | – | – | (15.7) |
| Other | (4.2) | (0.5) | 3.5 | (1.2) |
| Europe | (1.5) | (1.1) | 3.4 | 0.8 |
Service revenue grew by 6.3%, or by 2.1% on an organic basis, with strong growth in data revenue being the main driver of organic growth. Revenue was also positively impacted by the 9.3% rise in the total registered mobile customer base to 110.6 million at 31 March 2008. These factors more than offset the negative effects of termination rate cuts, the cancellation of top up fees on prepaid cards in Italy resulting from new regulation issued in March 2007 and the Group’s ongoing reduction of European roaming rates. Business segment service revenue, which represents 28% of European service revenue, grew by approximately 5% on an organic basis, driven by a 21% growth in the average business customer base, including strong growth in closing handheld business devices and mobile PC connectivity devices.
EBITDA increased by 3.1% for the year ended 31 March 2008, with a decline of 0.1% on an organic basis, and the difference primarily due to favourable exchange rate movements. EBITDA included the benefit from the release of a provision following a revised agreement in Italy related to the use of the Vodafone brand and related trademarks, which is offset in Common Functions. EBITDA was also impacted by higher customer and direct costs and the impact of the Group’s increased focus on fixed line services, including the acquisition of Tele2 in Italy and Spain.
Germany
Service revenue remained stable, or declined by 2.9% at constant exchange rates, mainly due to a 7.8% decrease at constant exchange rates in voice revenue resulting from a reduction in termination rates, the full year impact of significant tariff cuts introduced in the second half of the 2007 financial year and reduced roaming rates. This was partially offset by the 34.4% growth in outgoing voice minutes, driven by a 9.1% increase in the average customer base and higher usage per customer. Messaging revenue fell by 9.0% at constant exchange rates, due to lower usage by prepaid customers and new tariffs with inclusive messages sent within the Vodafone network, which stimulated an 8.8% growth in volumes, but was more than offset by the resulting lower rate per message. These falls were partially offset by the 35.8% growth at constant exchange rates in data revenue, largely due to a 71.9% increase in the combined number of registered mobile PC connectivity devices and handheld business devices, particularly in the business segment, as well as increased Vodafone HappyLive! bundle penetration in the consumer segment. During the year, the fixed broadband customer base increased by 0.5 million to 2.6 million at 31 March 2008.
EBITDA fell by 1.1%, or 5.0% at constant exchange rates, primarily due to the reduction in voice revenue. Total costs decreased at constant exchange rates, mainly as a result of a 3.6% decrease at constant exchange rates in direct costs resulting from termination rate cuts as well as fewer handset sales to third party distributors and lower content costs than in the 2007 financial year, offset by higher access line fees from the expanding customer base. Operating expenses fell by 9.2% at constant exchange rates, reflecting targeted cost saving initiatives, despite the growing customer base. Customer costs rose by 5.0% at constant exchange rates, due to a higher volume of gross additions and a higher cost per upgrade from an increased focus on higher value customers.
Italy
Service revenue increased by 0.6%, as a 7.4% fall in voice revenue was offset by 17.3% and 39.8% increases in messaging and data revenue, respectively, all at constant exchange rates, as well as the contribution from the Tele2 acquisition in the second half of the year. On an organic basis, service revenue fell by 2.0%. The regulatory cancellation of top up fees and reduction in termination rates led to the fall in voice revenue but were partially mitigated by a 21.5% rise in outgoing voice usage, benefiting from a 23.2% increase in average consumer and business contract customers, successful promotions and initiatives driving usage within the Vodafone network, and elasticity arising from the top up fee removal. The success of targeted promotions and tariff options contributed to the 31.8% growth in messaging volumes, while the increase in data revenue was driven by the 108.0% growth in registered mobile PC connectivity devices.
EBITDA increased by 0.4%, but decreased by 3.2% on an organic basis, primarily as a result of the fall in voice revenue due to the regulatory cancellation of top up fees. Direct costs decreased by 0.3% on an organic basis, reflecting the growth in outgoing voice minute volumes, offset by a higher proportion of calls and messages to Vodafone customers and lower prepaid airtime commissions. Customer costs rose by 13.7% on an organic basis due to the investment in the business and higher value consumer contract segments. Operating expenses fell on an organic basis by 19.7% as a result of the release of the provision for brand royalty payments following agreement of revised terms.
Spain
Spain delivered service revenue growth of 9.7%, with 6.7% growth in voice revenue and 31.1% growth in data revenue, all at constant exchange rates, as well as the contribution from the Tele2 acquisition in the second half of the year. Organic growth in service revenue was 8.1%, with lower organic growth of 5.8% in the second half of the year resulting from a slowing average customer base growth rate in an increasingly competitive market. Outgoing voice and messaging revenue benefited from the 9.1% growth in the average customer base and an increase in usage and volumes of 14.1% and 12.7%, respectively, driven by various usage stimulation initiatives. A 101.1% increase in registered mobile PC connectivity devices led to the increase in data revenue.
Spain generated growth of 15.3% in EBITDA, or 11.1% on an organic basis, due to the increase in service revenue, partially offset by a 4.5% rise in organic customer costs driven by the higher volume of upgrades and cost per contract upgrade as well as a reduction in gross additions. The proportion of contract customers within the total closing customer base increased by 3.2 percentage points to 58.0%. Direct costs increased by 5.6% on an organic basis as the benefit from termination rate cuts was more than offset by the higher volumes of outgoing voice minutes. Operating expenses increased by 0.4% on an organic basis but fell as a percentage of service revenue as a result of good cost control.
UK
The UK recorded service revenue growth of 5.8%, with an 8.9% increase in the average customer base, following the success of the new tariff initiatives introduced in September 2006. Sustained market performance and increased penetration of 18 month contracts, which led to lower contract churn for the year, contributed to the growth in the customer base. Voice revenue remained stable as the lower prices were offset by a 16.6% increase in total usage. Messaging revenue increased by 21.7% following a 36.7% rise in usage, driven by the higher take up of messaging bundles. Growth of 28.5% was achieved in data revenue due to improved service offerings for business customers and the benefit of higher registered mobile PC connectivity devices.
Although service revenue grew by 5.8%, EBITDA fell by 1.9% as a result of the rise in total costs, partially offset by a £30 million VAT refund. Direct costs increased by 12.4% due to the 20.0% growth in outgoing mobile minutes, reflecting growth in the customer base and larger bundled offers and cost of sales associated with the growing managed solutions business and investment in content based data services. The UK business continued to invest in acquiring new customers in a highly competitive market, leading to a 6.3% increase in customer costs. Operating expenses increased by 8.5%, although remained stable as a percentage of service revenue, with the increase due to a rise in commercial operating costs in support of sales channels and customer care activities and a £35 million charge for the restructuring programmes announced in March 2008.
Other Europe
Other Europe had service revenue growth of 6.9%, or 2.4% on an organic basis, with strong organic growth in data revenue of 41.3%. Portugal and the Netherlands delivered service revenue growth of 7.2% and 9.0%, respectively, at constant exchange rates, as both benefited from strong customer growth. These were mostly offset by a 6.2% decline in service revenue in Greece at constant exchange rates, which arose from the impact of termination rate cuts in June 2007 and the cessation of a national roaming agreement in April 2007.
In Other Europe, EBITDA grew by 6.4%, or 2.9% on an organic basis, largely driven by the 3.0% rise in revenue at constant exchange rates, but offset by increased customer costs. The growth in EBITDA was primarily driven by increases in Portugal and the Netherlands of 12.3% and 7.9%, respectively, at constant exchange rates, resulting from the growth in service revenue, as well as good cost control in Portugal. These were partially offset by the 4.4% fall at constant exchange rates in Greece, where results were affected by a decline in service revenue, increased retention and marketing costs and a regulatory fine.