A key development was the announcement in May 2018 of our intention to acquire Liberty Global’s cable assets in Germany, the Czech Republic, Hungary and Romania for €18.4 billion, which will transform Vodafone into Europe’s leading next generation infrastructure owner and a truly converged challenger to dominant incumbents. In addition, we made good progress in securing approvals for the merger of Vodafone India with Idea Cellular, which is expected to close in June 2018.

A strong financial performance

In addition to these strategic achievements, the Group enjoyed a strong financial performance. Our organic service revenue growth remained modest at a little below 2%, but our sustained focus on cost efficiencies through the “Fit for Growth” programme contributed to organic adjusted EBITDA growth of 12% (8% on an underlying basis)¹, with broad-based improvements across most of our markets. This in turn drove a 47% rise in organic adjusted EBIT and 44% growth in adjusted earnings per share.

Progress in Netherlands, challenges in India

In order to strengthen our assets strategically amid highly competitive markets, in recent years we have announced joint ventures in the Netherlands (‘VodafoneZiggo’) and India (‘Vodafone-Idea’). Despite a 4% local currency revenue decline in the year, VodafoneZiggo’s financial performance is expected to stabilise during the year ahead, supported by the success of its convergence strategy and significant cost and capex synergies.

Vodafone India experienced a 19% organic service revenue decline during the year, reflecting intense competitive and regulatory pressures. Nick Read will outline in his CFO’s review the steps which we are taking to strengthen the combined company’s future financial position, ensuring that we can compete effectively going forwards in a consolidated market.

The future is exciting – for our customers and for Vodafone

Vodafone’s ultrafast and widely available fixed and mobile networks are enabling a range of exciting new technologies, which contribute to society and create an exciting future for our customers, employees and shareholders. Our new global brand campaign, ‘‘The future is exciting. Ready?’’, which launched last autumn, communicated that Vodafone will support our customers every step of the way, helping them to make the most of new and exciting innovations.

We have ambitious sustainable business goals

Our sustainable business strategy, lies at the heart of our development, as we are convinced that the long-term success of our business is closely tied to the success of the communities in which we operate. Vodafone’s digital networks and services act as a catalyst not only for economic growth, but also for equality and empowerment. We focus our efforts where we believe we can make the greatest impact, and we now have long-term external and internal ambitions in place to deliver our strategy.
Key highlights include our commitment to reduce our greenhouse gas emissions by 40% and purchase 100% of electricity we use from renewable sources. We also intend to support 10 million young people by 2022 through our future digital jobs programme, “What will you be?”, which will help to address the dual challenges of youth unemployment and a growing digital skills gap.

Returns are improving

We have previously highlighted the need for the Group to improve the returns that we are achieving on the substantial organic and inorganic investments that we have made in recent years. In part, this relies upon a better balancing of competition and investment considerations by European regulators and governments, particularly as we approach spectrum auctions for 5G. However, we also remain focused on making improvements under existing industry conditions.

This has been a challenging year for the Telecoms sector in Europe and particularly in India. While we underperformed the FTSE 100 we outperformed our peers, in some cases materially so, as a result of the progress we are making. The Board’s confidence in our outlook is demonstrated by a further 2% increase in our dividend per share to 15.07 eurocents for the year.

CEO succession: our thanks to Vittorio

In May 2018, we announced the succession plan for the Group Chief Executive role. From 1 October, Vittorio Colao will be succeeded by Nick Read, our current Group CFO, with Margherita Della Valle (our Deputy CFO) succeeding Nick Read and joining the Board after the AGM in July.

On behalf of the Board, I would like to express our gratitude to Vittorio for an outstanding tenure. He has been an exemplary leader and strategic visionary who has overseen a dramatic transformation of Vodafone into a global pacesetter in converged communications, ready for the Gigabit future. Vittorio will leave as his legacy a company of great integrity with strong inclusive values that is exceptionally well-positioned for the decade ahead. I also would like to recognise from a governance perspective the great way in which Vittorio has worked together with the Board in an atmosphere of openness, transparency and trust.

Nick has been the co-architect of the Group’s strategy together with Vittorio, combining extensive international operational and commercial leadership with world-class financial acumen. I am confident Vodafone will benefit greatly from his experience, insight and wisdom in his new role as Group Chief Executive. Margherita has a strong track record in financial leadership at the highest levels, and I am delighted to welcome her to the Board. I would also add that the appointment of Nick and Margherita serves as a testament to the strength and depth of the Vodafone senior leadership team that Vittorio has assembled and led over the last decade.

In order to maintain our leadership position we will continue to enhance our network and deploy new market leading technologies.

Evolving our 4G network to be 5G ready

We are continuing to evolve our 4G network towards delivering gigabit data speeds, increased network capacity, improved response (latency) times, and new service capabilities. These network enhancements are being delivered through a range of advanced technological solutions. As an example, we are now rolling out massive MIMO (multiple input and multiple output) antennas in our markets. These antennae fundamentally change the way in which we transmit radio signals. Rather than the signal being transmitted everywhere, massive MIMO provides multiple beams of signal and each beam is assigned to a unique user or group. It therefore delivers a better and more reliable user experience, creates less interference, and has the benefit of increasing the site capacity by improving spectrum efficiency. This evolution of 4G combined with new 5G radio spectrum and antennae will provide the underlying network infrastructure for 5G.

Future-proofing our fixed line infrastructure

In fixed, we are upgrading our cable infrastructure to the latest DOCSIS 3.1 technology and deploying fibre deeper into the network. This delivers a significant improvement in maximum user speeds and network capacity. The rollout of DOCSIS 3.1 is now well advanced in Spain, while in Germany we have commenced a two year rollout programme starting in 2018.

The programme focuses on four key aspects of our customers’ experience with Vodafone, summarised by the acronym ‘CARE’. Given the strategic importance of the programme, CXX performance indicators including Net Promoter Scores (‘NPS’) and brand consideration represent up to 40% of the annual bonus award for employees across the Group.

As the initiatives described below illustrate, we have made good progress this year in each of the areas covered by our CARE framework:

Connectivity that is secure and smart

Our “Secure Net” proposition is now live in ten markets, providing customers with extra security protection. And we have mobile network guarantees in place across 17 markets, promising customers their money back if the network fails to meet their expectations within their first month of use.

Always excellent value

Through our Big Data platform, which is live in 15 markets, we are able to notify customers of personalised solutions which meet their specific needs. Today, 35% of our communications with customers in these markets are supported by Big Data analysis.

Real-time relevant rewards

Loyalty and reward programmes have now been implemented in 18 markets and are available either via the My Vodafone app or the Vodafone website. In 14 markets, we have also introduced gamification activities to make redemption of these rewards a fun experience, such as “Shake”, where customers shake their phone to receive rewards.

Easy, Personal Instant Access

The My Vodafone app, which is now live across all of our markets, provides customers with a flexible way of monitoring and managing their services online. By the end of the financial year, My Vodafone app penetration across the Group reached 60%, up 5% year-on-year with customers on average using the app over nine times per month.

We expect to further enhance our customers’ experience through digital channels and platforms. The focus will be on scaling up real-time and personalised offers, deploying artificial intelligence (AI) across both service and sales touchpoints and simplifying the access and use of our services, for example, via touch ID login and integrated virtual assistants.

This targeted programme uses external “best in class” benchmarks to determine cost saving opportunities both at a local market and a Group level, where our global scale can provide a competitive advantage.

At the start of this year we launched our second phase of Fit for Growth, enabling us to broaden and deepen our cost saving initiatives.

We have also developed a new customer profitability analytics platform, which has now been rolled out across nine markets. We see a substantial opportunity for margin improvement as we take commercial actions to capitalise on these insights.

We have continued to make good progress this year in lowering our operating cost base, reflecting the success of our Fit for Growth efforts. These Group initiatives include centralising procurement, developing shared service centres in low cost regions, improving sales channel efficiency, standardising network design and zero based budgeting (‘ZBB’) initiatives. As a result, we were able to lower our net operating costs on an organic basis for the second year running. Importantly, this cost reduction was achieved while maintaining our robust commercial momentum and despite a 63% increase in mobile data traffic during the year.

This sustained focus on cost efficiencies meant that for the third year in a row we were able to grow our adjusted EBITDA faster than service revenues, supporting a significant improvement in our adjusted EBITDA margins. This improvement was broad-based, with 20 out of 25 markets growing adjusted EBITDA faster than service revenue during the past year. Overall, we achieved a 1.3 percentage point improvement in the Group’s underlying organic adjusted EBITDA margin (excluding EU regulation, UK handset financing, and legal settlements).

Digital customer management

We intend to increase the use of data analytics to provide predictive, proactive and personalised offers to our customers, optimising the efficiency of our marketing spend, enhancing ARPU and improving our direct channel mix. The My Vodafone app and our digital marketing channels will, over time, become our main customer acquisition and management platform.

We will also be able to meet any customer request through automated, digital support – for example, by using chatbots and digital agents that utilise rapidly developing artificial intelligence technologies, developed and shared on a Group-wide basis.

Digital technology management

We will rapidly install new “middleware” on top of our legacy IT systems. This “Digital eXperience Layer” will accelerate the deployment of new digital capabilities, de-coupling them from the longer and financially costly upgrade cycles for our legacy billing and other systems. In addition, real-time data analytics will enable even smarter network planning and deployment, as well as more precise ROI-based investment decisions.

Together with the ongoing effort to migrate 65% of our IT applications to the cloud, we aim to achieve significant capex and opex efficiencies, allowing us to re-invest based on customers’ actual and predicted profitability.

Digital operations

We see substantial scope for digitalisation to accelerate the simplification and automation of standard processes, in both operational and support areas. These include IT and network operations, customer management back office functions and all other administrative activities.

We have already established an automation unit and we have made good progress with over 200 bots active in our Shared Service Centres.

Our three “growth engines” performed well. Mobile data growth remains strong, up 63% year on year, and our “more-for-more” propositions helped to offset regulatory headwinds. We remained Europe’s fastest growing and leading challenger in broadband, adding 1.1 million households during the year, and also added 0.8 million converged customers, typically increasing ARPU and reducing churn. Meanwhile, our Enterprise business continued to outperform our peers thanks to the success of our world-leading IoT division, despite an overall declining market environment. We achieved all of this, while lowering our net operating costs on an organic basis for the second year in a row, thanks to our Fit for Growth initiatives.

Network leadership: preparing for 5G

The substantial investments we made during Project Spring, supported by sustained ongoing capital expenditure, have allowed us to maintain our network leadership and co-leadership positions in mobile. In several markets – notably in Germany and Italy – the gap in performance between ourselves and the value players continued to widen, supporting a premium price differential.

We are optimistic about the long-term potential of 4.5G and 5G services, and we intend to invest in the upcoming 5G spectrum auctions over the next two years in order to maintain and optimise our spectrum position across all technologies.

We expect to deepen our 4.5G coverage and then launch 5G services in 2020, once handsets are widely available, as this will become the lowest cost option to add incremental capacity. We expect 5G investments to be funded from within our existing levels of capital expenditure.

Acquiring Liberty Global’s cable assets in Germany, Central and Eastern Europe

In May 2018, we announced our intention to acquire Unitymedia in Germany, as well as the UPC cable assets in Central and Eastern Europe (‘CEE’), from Liberty Global for a total enterprise value of €18.4 billion. This transaction transforms Vodafone into Europe’s leading next generation infrastructure owner with 54 million on-net homes, out of a total NGN footprint of 114 million. In Germany we will become a converged national challenger, and in our predominately mobile-only markets in CEE we will significantly accelerate our convergence strategy. In total we will acquire gigabit capable networks passing 17.4 million marketable homes, including 11.0 million in Germany, with an attractive organic growth outlook given a speed advantage versus local incumbents and relatively low broadband penetration. In-market consolidation across the four countries is expected to create synergies with an NPV of over €7.5 billion, with run-rate cost and capex savings of €535 million by the fifth year post completion (before integration costs). The transaction is subject to regulatory approvals and is expected to close around the middle of calendar 2019.

Creating a new market leader in India

I am pleased with the progress we are making in securing regulatory approvals for the merger of Vodafone India with Idea Cellular, which is expected to close by the end of June, and we recently announced the appointment of a combined management team. Separately, in April 2018 we also announced the merger of Indus Towers with Bharti Infratel, creating India’s leading listed tower company in which we will own a significant liquid stake.

Customer eXperience eXcellence (‘CXX’) and Digital Vodafone

Our efforts to deliver an outstanding customer experience, capitalising on our leading network quality, contributed to further gains in NPS across most of our markets during the year. In 17 of our 20 markets we now have a leading or co-leading consumer NPS score. Even more importantly, the NPS gap between ourselves and the third placed competitor (typically the value-players) is now 16 points.

During the year we decided to initiate a new strategic programme, “Digital Vodafone”, which will leverage on our earlier work with the CXX programme. We aim to transform our business model by delivering the most engaging digital experience for our customers; using advanced data analytics to improve all commercial and technology investment decisions; and automating key aspects of our operations. Our ambition is to generate incremental revenues and to further reduce net operating costs on an organic basis.

The programme is already being implemented across our largest operating businesses, where we are merging commercial and technology teams to achieve better and more efficient product and service development, at a lower cost than in the traditional “siloed” functional model. We are also insourcing critical digital skills, in order to reduce reliance on external developers and adopt more agile working processes, and we have strengthened our internal digital marketing platforms and units, to achieve a better return on our media investments.

This transformational programme will be the most important source of differentiation and efficiency gains for Vodafone in the coming years.

Chief Executive succession

It has been a privilege to spend 20 years of my life working at Vodafone, the last ten of which as Group CEO. The company has evolved from a collection of assets – mostly consumer mobile – and minorities, to a strong mobile and fixed infrastructure owner, with co-controlled JVs and a strong Enterprise business. I am highly confident that Nick Read and Margherita Della Valle, whom I have worked with extensively throughout this time, are the right choices to lead the company through this exciting next phase of convergence and digital transformation.

This margin improvement was supported by a further annual reduction in our organic operating costs on an absolute basis, reflecting the success of our “Fit for Growth” efforts. These include centralising procurement, developing Shared Service Centres and undertaking zero based budgeting efforts across the Group. Importantly, we achieved this cost reduction while maintaining robust commercial momentum, and despite a 63% increase in mobile data traffic during the year.

Our ambition is to continue to reduce net operating costs over the long-term through the “Digital Vodafone” programme, which aims to achieve savings by digitalising key aspects of our customer management, technology management and operational processes – activities which at present represent over €8 billion of annual cash costs. We are increasing our investments in “Agile” cross-functional teams, digital tools and IT capabilities, in order to strengthen our ability to market directly to our customers via the web and the My Vodafone app. By the 2021 financial year, our target is that over 40% of our sales are via digital channels, up from just 11% today. This will allow us to reduce the commissions paid to third-party distributors and optimise the size of our retail footprint.

We are also creating efficient digital customer care solutions, including AI-enabled chatbots, in order to reduce the loading in our call centres, with a target that 60% of contacts are via digital agents by 2021. And we are introducing new “smart capex” allocation methodologies, based on broader and deeper data analytics which enable us to understand our profitability both by customer and by mobile site.

Maintaining a strong balance sheet post acquisitions

Vodafone has benefited throughout its history from a strong balance sheet and a robust investment grade credit rating, providing reliable and cost-effective access to debt capital markets. Our proposed acquisition of Unitymedia in Germany and cable operations in Central and Eastern Europe from Liberty Global does not alter this fundamental commitment.

We believe that modestly higher financial leverage – within an expected range of 2.5x–3.0x net debt/adjusted EBITDA moving forwards – is fully justified by an improved organic growth outlook and a more resilient revenue mix, as the Group becomes both more converged and more European following the acquisition.

Our determination to maintain a robust investment grade credit rating is reflected in our intention to issue around €3 billion of new mandatory convertible bonds, as well as hybrid debt securities (which receive equity credit from rating agencies), as part of the financing for the acquisition. We will have the option to buy the mandatory convertible bonds back in three years’ time, avoiding equity dilution for our shareholders, providing that we have sufficient headroom within our targeted leverage range. On a pro-forma basis for the transaction with Liberty Global, our leverage was 3.0x as at 31 March 2018.

Developments in India

Given high competitive intensity and regulatory pressure, Vodafone India’s service revenue contracted by 19%* and adjusted EBITDA by 35%* on an organic basis during the year, while Idea Cellular reported a similar financial performance. We have taken a number of steps during the year to strengthen the financial position of the future joint venture, raising approximately €3.5 billion in incremental financing for the business. These actions include:

• The sale of Vodafone India and Idea’s standalone tower assets for €1.0 billion, which we announced in October 2017
• Idea’s equity raise of €0.8 billion in January 2018, which Vodafone Group will match at the time the merger closes; combined with other adjustments, we currently estimate a net capital injection into India of up to €1 billion at closing in June 2018
• The option to sell Idea’s 11.15% stake in Indus Towers to Bharti Infratel for approximately €0.8 billion in cash (based on the announcement on 25 April 2018); alternatively, the JV can elect to receive shares in the enlarged Indus Towers Ltd when the merger between Indus Towers and Bharti Infratel completes (by the end of fiscal 2019, subject to regulatory and other approvals).

These measures will support the joint venture while it focuses on capturing operational synergies as fast as possible; in addition, post competitor rationalisation the Indian mobile market has scope to recover, especially given the cash outflows currently experienced by the remaining operators. However, the company’s financial leverage is currently high on a pro-forma basis. In the event that in the future the joint venture partners decide to put in additional funding, the Group would draw upon the value of its stake in Indus Towers.

Strong 2018 financial results – exceeding guidance

During the year we exceeded our initial guidance for “4-8% organic adjusted EBITDA growth” and “around €5 billion of FCF pre-spectrum”. At our half year results we revised our guidance upwards to “around 10% organic adjusted EBITDA growth”, stating that we expected “to exceed €5 billion of FCF pre-spectrum”. We more than met these revised targets, with 12%^* organic adjusted EBITDA growth and €5.6 billion of FCF pre-spectrum on a guidance basis. However, it is important to note that excluding the benefit of UK handset financing, settlements in the UK and Germany and the impact of EU regulation, our organic adjusted EBITDA growth was closer to 8%^*.

A covered dividend

During the year we invested €1.1 billion in spectrum, renewing our 2G spectrum in Italy and making a down-payment for the UK 5G spectrum auction. Consequently, our FCF generation post spectrum and restructuring was €4.0 billion, higher than our cash dividend obligation of €3.9 billion. In the coming two years we expect higher spectrum costs as we look to acquire 5G spectrum in the 3.4-3.7GHz bands, as well the 700MHz band, across most European markets.

On the basis that this concentration of auction activity does not change our long-term average annual spectrum cost, which was €1.2 billion taking the average of the past nine years, we expect that our FCF generation will – on average – continue to cover our dividend obligations. This provides the Board with the confidence to reiterate our intention to grow the dividend per share annually, and recommend a further 2.0% increase in the dividend to 15.07 eurocents for the year.

Looking ahead

In the 2019 financial year, we expect to grow adjusted EBITDA by 1–5% on an organic basis, excluding the impact of UK handset financing and settlements, despite the arrival of a new entrant in Italy and increased competition in Spain. This implies an adjusted EBITDA range of €14.15–€14.65 billion at guidance exchange rates, under current accounting standards. We expect to generate FCF pre-spectrum of at least €5.2 billion.

During the coming year we will report our results under the new IFRS 15 accounting standard as well as under the prior accounting standards. Under IFRS 15, we expect our organic service revenue growth will be slightly higher, and our absolute adjusted EBITDA slightly lower, primarily due to the elimination of the impact of UK handset financing under our current accounting standards, with no impact on FCF.

My priorities:
Delivering a Digital Vodafone, leading in a Gigabit world

I feel both privileged and hugely energised by the opportunity to lead Vodafone, supported by a world class team, and I would like to recognise Vittorio for transforming Vodafone into the company it is today, and personally thank him for his mentorship over the past 12 years.

My immediate priorities will be to continue to work closely with Vittorio to conclude the India merger process, to make good progress in securing regulatory approvals for the acquisition of Liberty Global’s cable assets, and to accelerate the Digital Vodafone programme.

The Group has a clear strategic direction, so in the coming year I intend to focus on our organic performance, building on our leadership in next-generation networks and mobile to place us at the heart of a converged Gigabit Society. We need to deliver on our integration plans and the substantial synergies arising from our transactions in India, Germany and Central and Eastern Europe. At the same time, we must use Digital Vodafone to transform not only the world around us, but also our own business – enhancing the experience for our customers, while simplifying and streamlining our internal processes to achieve a much higher level of efficiency, and generate higher returns.

Our Global Transformation Areas

Our strategy focuses our efforts in the areas in which we believe we can have the greatest possible impact: women's empowerment, youth skills and jobs and energy innovation. We now have long-term goals in place for each one:

Read more about Sustainable Business in our 2018 report