Source: Seeking Alpha
Vodafone Group (NASDAQ:VOD)
Q1 2015 Earnings Conference Call
July 25, 2014 4:30 a.m. ET
Vittorio Colao – Chief Executive
Nick Read – Chief Financial Officer
Steve Pusey – Chief Technology Officer
Philipp Humm – Regional CEO Europe
Akhil Dattani – JPMorgan
Tim Boddy – Goldman Sachs
Nick Delfas – Redburn Partners
Justin Funnell – Credit Suisse
James Ratzer – New Street Research
David Wright – Bank of America
James Britton – Nomura
Simon Weeden – Citigroup
Robert Grindle – Deutsche Bank
Andrew Beale – Arete Research
Jerry Dellis – Jefferies
Lawrence Sugarman – UBS
Adam Rumley – HSBC
Paul Marsch – Berenberg Bank
Ottavio Adorisio – Societe Generale
John Karidis – Oriel Securities
Welcome to the Vodafone Group analyst and investor conference call. Your host today is Vittorio Colao, CEO of the Vodafone Group. Please go ahead, Mr Colao.
Vittorio Colao – Chief Executive
Good morning everybody. Welcome to our interim management statement for the first quarter of ’14-’15. I will take you through the highlights and update you on our strategic and commercial developments and our views on the current regulatory environment, then Nick will update you on our financial performance and take you through the trends in our six key markets. He will also provide some country by country detail on the progress of Spring. We’ll then close and move to Q&A for which Nick and I will be joined by Philipp and Steve who are here with us.
So I will start with Slide 4: highlights for the quarter. Group organic service revenue was down 4.2% compared to 4% in the previous quarter, excluding mobile termination rates, was 2.9% in Q1. We continue to see strong growth in our emerging markets driven by continued customer growth and data usage.
Growth in AMAP was 4.7% or 6.2% excluding MTRs. This growth rate was, as expected, slightly down on the previous period due to the lapping of prior year prices rise in India and the impact of MTRs in South Africa.
In Europe, conditions remained challenging due to continued competitive and regulatory pressure. As a result, service revenue fell 7.9% year-on-year. However we are beginning to see encouraging signs of stabilization quarter on quarter due to our commercial actions on Red and 4G and investment in the network. Our actions are attracting a higher quality of customers. We now have 6.7 million customers with 4G and 14 million with Red. Our 4G and Red plans to continue to drive strong data usage. Data traffic growth accelerated to 73% year on year across the group and 53% in Europe.
Project Spring. Our Project Spring program is gaining speed. Our European 4G coverage increased that to 52%. This is up 20 percentage points since September. Our network performance is also improving. In the last nine months, we have reduced dropped calls in Europe by 1.2 million per day. In this quarter, we have made further progress also in our unified communications strategy across Europe.
Integration of Kabel Deutschland has begun and is on track. We have announced fiber alliances in Ireland and in Portugal this week, and just this week, we had also two further steps – the completion of the acquisition of Ono and the revised agreement with Orange to build fiber and give them access to 1 million homes from Ono.
Finally, we have made some smaller moves on the M&A front, including the planned purchase of Cobra, a leading machine to machine provider to enhance our capabilities in this space and we sold our business in Fiji.
Free cash outflow was £0.6 billion in the quarter. This is £1.5 billion lower than the last year due to the phasing of CapEx spend associated with Spring. Net debt at the end of the quarter was £14.1 billion.
So Nick will be talking later about the performance of each of the main countries in more detail. I would like now to give you an overview of the broader
Chart on page 5 shows revenue service growth, excluding termination rates with AMAP countries in blue and Europe countries in red. As you can see, AMAP is strong and growing with service revenue up 6.2 points. Our high quality network and customer service continues to attract customers with the base up 10% in the year driving usage.
The number of data users increased by 31% to over 100 million and data traffic more than doubled. Also, not on this slide, I also want to talk or check – say a word about M-Pesa. M-Pesa remains a key success story for us. The base is now 18 million, up 1 million in the quarter.
This slide also shows that revenue continues to decline 6.6 in Europe. However we are seeing some mobile ARPU stabilization, and we are also delivering better churn rates in consumer contract around 1 percentage point better year on year. What this slide does not show is that we are seeing quarter on quarter stabilization in absolute revenue in a number of key markets in Europe such as Italy and Germany.
I’d like now to turn to progress against several key initiatives, Spring, 4G and unified communications in that order. So Slide 6, we have made a good progress on our Project Spring program and in overall terms we are around A quarter of the way through the program.
Within the 6000 new 4G base stations, 4700 were in Europe in the period. Therefore our European 4G coverage increased to 52% as I mentioned a while ago, compared to 46% last quarter and 32% when we started the program. So we are well on our way to our 91% target by March 2016.
In India, where we aim to have 95% 3G outdoor coverage in targeted urban areas over the next three years, we have taken the 3G coverage on this footprint to 89% with around 2300 sites added in the quarter. In South Africa, we added around 470 4G sites and 290 3G sites in the last three months only. 75% of our sites in South Africa are now connected to high-capacity backhaul and we expect to complete our radio access network renewal program in the next quarter.
We continue to build a more robust network with more single RAN and high-capacity backhaul. Today in Europe, 72% of our sites have high-capacity backhaul and 22% have fiber. Single RAN is in 68% of our sites and finally in terms of fiber to the home we have increased these by 1 million household passed since last September.
So we are now on Slide 7: 4G. We have put together a number of charts here showing clear evidence of good progress. Starting from the top left, we have increased our 4G customer base – the red bars – to around 7 million as I said earlier. These are active customers with both 4G device and a 4G plan. The opportunity to upsell is clear as 7 million out of 15 million who have a device do not have a 4G plan yet.
You will see within the trend that the proportion of those who have a device that also have a plan is increasing as well to 49% compared to 36% in Q3 last year.
Moving to top right, we are delivering a better network experience. As I said our 4G network now covers 52% of the population. We are supporting the 4G rollout with the targeted local communications strategy focusing on network benefits and differentiation rather than price.
Bottom left, we see that the trend to use more data continues. Data usage in Europe is not just growing, it is also accelerating with growth of 42% last quarter and 53% in this quarter. This growth is evident in all of our main markets in Europe. This traffic is driven by more smartphones where penetration of the base increased 7 percentage points now at 47% in Europe. As half of the base still don’t have a smartphone, there is clearly a lot of growth left.
Now there is also more usage for smartphone as it is now 530 MB in Europe, this is up 100 MB on the level of just six months ago. Also 4G usage is still around twice the level of 3G in some countries where we have attractive content such as UK, the ratio becomes three times. As a result of this strong demand 4G now accounts to 19% of data traffic on our European network, up one percentage point on Q4. This is why we’re pushing content combined with 4G.
We have now launched content in eighth markets, seven in Europe. We aim for the most relevant partners in each market. During the quarter we added a full content bundle of music and theme in Spain from Canal+ and Napster as a part of the Red tariff plan. In Italy we launched music and video services with Infinity and Spotify and in UK we launched Netflix on the July 1 for Red customers, adding this to the existing content choices that you are aware of, of Spotify and Sky Sports. We aim to add more content this in more markets over the coming weeks and months.
So further add [ph] on the strategy unified communications, this is page 8. This is an area where we have made significant progress during the quarter. Taking the right hand side of the slide first, we continue with the momentum on fixed broadband net adds with some 119,000 across the group of which 170,000 were in Europe. This represents the third consecutive quarter of strong growth. We now have 9.4 million fixed broadband users, including 2.3 from KDG.
Our total customer base increases to around 11 million after the acquisition of Ono. Vodafone today is one of the largest providers of fixed broadband services in Europe. Fixed now represents 23% of service revenues and 24% of enterprise revenue. Fixed revenue continues to be under pressure due to price competition in many markets but we are seeing overall revenue growth.
Now looking at the progress in deploying the services in the various markets. In Germany, the integration of KDG is now underway creating a fully integrated operator covering 12 million homes of 29% of the population. And in addition, we have also the attractive wholesale offer from DT which covers 40% of the population. In May, we commenced the cross-selling of services around 600 Vodafone stores and 200 KDG stores under a giant Zuhause brand.
Italy. In Italy, our self-built fiber rollout is progressing and we expect to reach our 6.4 million target by 2016 and this components a wholesale deal with incumbent which has an addressable base of 2.2 million. The recent Ono acquisition will allow us to establish a strong platform in Spain as that asset already covers 41% of the householders. And as mentioned, we have agreed to new terms with Orange to target 2 million homes in total while providing Orange with a wholesale access to 1 million home passed by Ono.
You may be aware that we also announced a couple of weeks ago a joint fiber deployment plans in Ireland and in Portugal we have a great a reciprocal deal with incumbent [covering 900,000 homes from December ‘14, 450,000 each. This further accelerated our build programs and so in Portugal now we are targeting 2 million homes passed compared to the original target of 1.5 million with Spring.
With all these agreements and our self-built programs we are now creating, as we declared in our strategy, a strong position across Europe. Looking at the left-hand side, which shows our coverage today, we already have NGN access to potentially around 40 million homes in Europe. Going forward our self-built plans will increase the number of homes passed by further 5 million over the next couple of years.
And then on Slide 9, my views on the regulatory environment in Europe. As I said that six months ago, the situation is improving or did [ph] not as much as it would be possible and in my view desirable. Consolidation is indeed happening as we see in Germany and in Ireland. I would say that the remedies imposed on non-infrastructure-based operators are a little bit inconsistent with the need to invest in coverage and services in Europe. But consolidation is anyhow a good thing.
Roaming regulation will need to be detailed. For Vodafone, this is less and less of an issue, as we succeed with our take your home tariff abroad option. We have today 15 — more than 15 million users of this service and we just extended it beyond Europe to a number of countries, including very importantly the US, India, Australia and New Zealand.
So my priorities for the year continue in the regulatory area, continue to be implementation of harmonized spectrum rules, net neutrality regulation and then roaming and the connected continent implementation.
In summary, again regulations in Europe is moving in the right direction. It could be a little bit more decisive in supporting our sector’s recovery.
Nick, I would turn to you for other details.