Vodafone Group Public Limited Company
Q4 2014 Earnings Call Transcript

Published: 19 May 2015

Vittorio Colao:

Good morning. Welcome. Thank you for coming to our year-end presentation. I will follow the usual path. I will give you the highlight for the year; then, I will pass to Nick for the financial review; and then, I will cover the main six markets and the progress and the priorities for next year. And then, of course, I will be joined by my colleagues for questions. So financial performance, first, this has been a year of continued growth in emerging markets and some stabilization in Europe. We returned with Group organic service revenue growth in the last quarter, after 10 quarters, albeit it a small one, plus 0.1%. Europe organic service revenue, at minus 2.4%, is an improvement versus the previous quarter, essentially driven by commercial execution and some price stability; and, of course, data growth. AMAP continues to perform well, 6% growth. Here, the story is the usual story of customer growth on one side, but a very strong data performance on the other. And then, from a financial point of view, we're meeting our full-year guidance; £11.9 billion of EBITDA and £1.1 billion of free cash flow. I will cover, in more detail, the strategic progress in the year. Spring is on track. We're at 62% of the mobile, 63%, to be precise. The European coverage is now already 72%. We're, today, the leading 4G operator in Europe, 20.2 million customers in 4G in 18 markets. Data volumes continue to grow; actually, accelerates again at 80% growth. In AMAP, 116 million data customers. The Indian 3G coverage in the urban areas that we targeted is now 90%. This is, of course, before the new frequencies will become available. And, I have to say, we also have very strong momentum in unified communications with 11.3 million broadband homes in Europe which makes us, depending whether you look at the markets we're in or total, between the third and the fourth largest provider of broadband in Europe. Integration of Ono and KDG, Nick will talk about it, is on track. The synergies are in line with expectations. And finally, something we're happy about; enterprise, in the last quarter, is back to organic growth. Again, we have good performance, that I will cover later. The most interesting element is the expansion of our IP-VPN presence to 62 countries internationally now which is almost twice what it used to be. These are the highlights. Nick, over to you with the details.
Nick Read:

Thank you, Vittorio. Good morning. Right, I will start with high-level financials. First of all, Group service revenue for the year declined 1.6%. As Vittorio said, the good news was, quarter 4, after 10 quarters of decline we finally move back into positive territory, even though a very, very small 0.1%. Group EBITDA, just down under 7% for the year. That 7% is roughly £800 million absolute year-over-year decline. Principally, in the first half £600 million, pretty much European direct margin decline, with a significant improvement in H2, given the stabilization of our revenue. Adjusted operating profit, at £3.5 billion, was down 24%, due to the lower EBITDA, but also the higher D&A, as a result of Spring and spectrum costs. If we move on to adjusted EPS there is a slightly more detailed version sitting in the appendix, but I just wanted to touch on the key points. First of all, net financing costs, we had a mark-to-market loss of £134 million in the year, versus last year a gain of £118 million. So, therefore, underlying, there was a decline of 6.8%, due to our lower average net debt position. Tax expenses fell £360 million year over year. £100 million was provision releases, because we had successful settlements with a number of tax authorities around the world; and the remainder is lower Group profit. Adjusted effective tax rate of 29.4% was in line with expectation. And you should expect a high 20%s in the medium term. Non-controlling interest declined, due to lower operating profits in those respective businesses, such as Vodacom. And, as a result, EPS declined 28%. So, in light of progress versus our Spring plan, we're confirming our full-year dividend growth of 2%, with a final total year dividend of 11.22p. Let's take a look at our service revenue by country. We've excluded MTRs and the Group as a whole declined 0.8%. And, as you see on the right of the chart, most of the European countries were in decline. But I just want to draw your attention to the bottom part of the chart, the bar at the bottom. You see the progress made across the portfolio in the year and you see that, by and large, most countries improved performance over the course of the year. The one noticeable exception being Vodacom which was under price pressure, both in South Africa and the international operations. Now, let's roll that on to quarter 4 and you see, basically, three factors. First of all, a number of countries that were growing, accelerating, more countries have moved into growth; and, as a whole, by and large, negative countries improving their position. And I was just saying to Philipp that, at this rate, we're going to have to find a different color for the European countries. Clearly, the notable exception is Germany. Consumer mobile and DSL ARPUs remain under pressure, given the value players in the market, but also given the back-book pressure that we've had relative to pricing in the marketplace. Now, with service revenue stabilizing and moving back into growth, let's have a look at our EBITDA performance. What I've tried to do, to get an underlying picture for EBITDA, is put this on a constant exchange and eliminate M&A. What you see is that H2 has stabilized against H1 and is down £200 million year over year; that £200 million, essentially, being the Spring investment in the second half of the year. On a regional level, H2 saw Europe moderating considerably. So H2 for Europe was down £270 million year over year, playing against an H1 performance of down £700 million. And AMAP produced a growth of £130 million; slightly higher than the first half. Moving on to free cash flow and the key drivers, capital expenditure, £9.2 billion, including £3 billion for Spring. Working capital had a slightly adverse significant variance of £2 billion year over year. And that, essentially, came down to four factors. First of all, last year we had £300 million one-time benefit as we bought terminal vendors into our central procurement company. And we got extended payment terms when we did that. Secondly, we had about £200 million of one-time payments this year. They included the Phones 4U deferred payment unwind and a Vodafone India payment to Indus for IRU. The third factor was £500 million central payment phasing. Occasionally, we get good economic terms for doing early payments. We took that in FY '15 and also in FY13, but we didn't do any of that in FY '14. And then finally, we have about £400 million to £500 million of working capital movements in any given day. So, obviously, we get a degree of volatility. Moving on to net interest, it's fallen, mainly because of a one-time cost last year of £250 million in relation to the dollar debt restructuring we did post Verizon Wireless. Moving on to cash tax, so we've put Verizon Wireless down into the other line to show the underlying reduction year over year and that's mainly driven by lower profits. But we did get the benefit of a number of lower non-routine payments and some timing benefits. So you should look at that line as being a normalized level of about £1 billion, going forward. Dividends received benefited from an abnormal high payment from Indus and look at the FY '14 as the normal run rate, going forward. Which takes our free cash flow to £1.1 billion or £4 billion excluding Spring. I wanted to update you on my key priorities for FY '15 which will remain my priorities for FY '16; the delivery of integration synergies; Project Spring returns; and cost optimization. And I just wanted to give a brief update on each, in turn. Starting with KDG, we were very careful in the integration of KDG to make sure that we didn't lose momentum that they had in the marketplace. We're very pleased to say that KDG continues to accelerate. In the quarter, total revenues up 7.1% versus Q3 of 6.5%, with strong NGN net adds of 123,000. Also, the KDG management took control of the DSL business of Vodafone and we've seen good gross add traction and momentum. And the migration to NGN products of our DSL is now hitting our target run rate, as of the year end. To maintain that commercial momentum and also to deliver in the Spring program, we did make a decision to delay our technology integration by about four or five months. But we're now ramping up and this is a key priority for FY '16. And finally, we will move to a single organization as of October which is six months ahead of the original business plan. Moving to Ono, we stabilized revenue, excluding wholesale and the recent FTR reduction. But we're behind our expectations and this is largely because of the very aggressive convergence pricing in the marketplace impacting our ARPU, though we're encouraged by some of the recent developments in pricing in the marketplace. We're very pleased with our Spanish team's performance in terms of the integration plan and they've accelerated a number of aspects of it. They're now one organization, co-located on the Vodafone campus. And I think there's three particular achievements that they've managed to do this year. The first is they renegotiated the MVNO contract with TEF. We will be fully migrating the customer base across by June which is broadly seven months ahead of the original business case. Secondly, they optimized the FTTH build program with Orange. We've reduced the build and also made sure it was complementary to the Ono footprint. And then finally, accelerated the cross-sell with 90,000 mobile and 45,000 fixed gross adds being sold into the respective bases. Second area was Project Spring. I think we've made excellent progress on the program. As you see on the top-left chart, one of the key deliverables was to have a fully modernized cost-efficient mobile network with high capacity backhaul, single RAN. And, as you see, we're at 73% and 68% of the build complete, respectively. You see then, on to the top right hand, following is the rollout of 3G to emerging markets and 4G across Europe. And you see that the program has now reached 56% at the midway point. Bottom left, good progress on the NGN build. We're now at 28 million homes passed with our own infrastructure, self-build of 3.2 million in the actual year. And then finally, enterprise capability and geographical coverage has been expanded with IP-VPN to 62 countries. And we will be launching our MVNO in the U.S., as of October. Now those builds progress has had a strong impact on the customer experience. As you see on the top left-hand chart, you see dropped call rate has nearly achieved our targeted goal of 0.5% for Europe and 1% for AMAP. Top right, you see the rollout progress. So, we're at 72% for 4G across Europe and at 82% 3G, 4G for AMAP. Bottom left, you see that 88% of the data sessions are now greater than 3 megabits per second. This is our definition, effectively, of high-definition video performance. And then, right-hand bottom chart, you see the combination of coverage and consistent performance driving usage. And Vittorio will be expanding on this more in his presentation. The third area is fit for growth. So, this is the cost program that we initiated in the year. What is different about this cost program? We're taking the total costs of the business. We're taking a three-year view within the business. And we're making sure that, centrally coordinated, we're identifying key initiatives that run across the business to shape our business so that it's fit for growth for the future. As you see on the chart on the left-hand side, total cost base £30 billion. You see the makeup of that cost base. You see the next column being our three-year CAGR. And what you see, if we'd done a solid performance, reducing that total cost base by about 1% per annum. You'll see that we benefited, obviously, from interconnect cost lowering, but also done a solid job on the OpEx side which is partially offset by direct costs increasing and customer costs increasing. What you see in the FY '15 performance, I would argue, is a slightly stronger performance. Bear in mind, interconnect, with MTRs running their course, obviously, declining less. But we've done a stronger performance, both in the customer cost area, where we have held our customer costs through some optimization of channels and commissions; and done a stronger job on the OpEx side, if we exclude the investments we've made from Spring. Now, as part of this exercise, we're doing a 80,000 benchmarking exercise. That came up with six areas where we felt there was greater opportunity. The first two are pretty obvious and also commercially sensitive, so I'm not going to go through those. But I thought I'd address the next four and just show you the degree of ambition that we have in each. If we take supply chain first, you see on the chart that we have EUR20 billion moving through our central procurement function, that's about 70% of the relevant spend; and we're looking to take that up by the end of this coming year to 80%. You see, in the process, that we've managed to bring the number of vendors that we have from 40,000 down to 14,000, as we consolidate. And this group have delivered consistently over many years a 10% reduction in total costs for us per annum. If you go over to the right-hand side, you see our shared service centers. As you see, FY '15 we stood at 17,000 employees in our shared service centers; that is up 4,000 year over year. You see it delivers to us a £300 million per annum saving, given labor arbitrage going offshore and also cost efficiencies. We're targeting one-quarter of our employees by FY18 will be in shared service centers. And I really want to stress the strategic advantage of shared service centers, because these are our employees in countries where we have operations and they have a passion for the service. And when we monitor the NPS from our operations they are considerably higher than our outsource partners, so we really think they add significant advantage to our business. Moving on to technology, we've done a lot in the network space. We've been doing a lot around rationalization, modernization. Now, 70% of our sites are shared across our business. Where we see the opportunity is in IT. If you take CapEx and OpEx, IT is roughly 5.5% of service revenue. We think we can drive that down to 3.5% to 4.5% through the transformation of our CRM billing estate; and also, project volume and scope with our outsource partners. On the right-hand side, you see that we're trying to balance both efficiency, but also a better customer experience, with penetration of digital service. And we believe we can drive our adoption of My Vodafone app to over 70% of European smartphones from the 25% today. Standing back on the cost front, what I would say is we've got very hard targets, multi-year, on these initiatives and it's part of how we will deliver a growth in our EBITDA going forward. One topic that probably as an industry we don't talk too much about is spectrum, so I thought I would. Over the past five years, spectrum has been relatively heavy on us and the industry. We've averaged, over the past five years, around just over £2 billion per annum, if we include the recent India auction. We've obviously been renewing and extending 900 megahertz, 1800 megahertz; 4G in Europe; 3G in India. FY '16 largely completes the picture for our major markets. We've got Germany; we've got Turkey; possibly, South Africa. Post-FY '16, you see a lot lower level of spend going forward. Yes, we've got some potential more 3G in India, a country that keeps on giving; and Italy, 900 megahertz, 1800 megahertz in FY19. Before then, 700 megahertz arise from FY20, onwards. On to the balance sheet, you see, in red, year-end net debt, £22.3 billion, with an average interest cost of 4.7%. To arrive at a pro forma for FY '16, we obviously add the India spectrum that we secured, dividend and then we have positive guidance free cash flow, gets you to circa around the £28 billion. This does not include the $5.2 billion of Verizon Wireless loan notes and does not include the FY '16 spectrum auctions I've just mentioned. We're very comfortable operating with a BBB+ rating which is broadly 2 times to 2.5 times net debt-to-EBITDA. Moving into FY '17, post-Spring, we return back to a capital intensity of 13% to 14% and the free cash flow starts to de-lever the company. Moving on to guidance, to help with the rationale, what the chart attempts to do is take a reported FY '15 EBITDA. It then takes that and restates it to FY '16 guidance FX. We adjust for the recent India regulation changes; and some drag in terms of MVNOs; some minor M&A, gets you to £11.4 billion on a like-for-like basis, with the guidance for the year. So, essentially, we're between 1% and 5% growth. Now, why the delta? What are the key variables? And I'll answer it, so that you don't have to ask me the question. One of them is India regulation and pricing. Of course, India is the world's master at coming up with new regulation by the month, so, of course, there is always a degree of variability there. I would say you would also look at both the rate of recovery on ARPU, both in Germany and Spain as being a key variable within the range. Finally, guiding on positive free cash flow and CapEx in the range of £8.5 billion to £9 billion for the second year of Spring. Given our performance, the fact that we're tracking to our Spring plan, net debt in line with expectation, strong underlying free cash flow, it's the Board's intention to grow the dividend per share in FY '16. To close, I think it's been a solid year of execution that returned Vodafone to growth. Guidance has delivered and we've made significant progress on our strategic priorities. Balance sheet remains strong and in line with the Spring plan. And we've got good underlying free cash flow, allowing us to grow the dividend per share. On that, I will hand back to Vittorio.
Vittorio Colao:

Very good. Let's go through some comments about the main markets and then talk more in general about the priorities for next year. First of all, Germany. In Germany, we saw a revenue service decline QonQ. As Nick has already said, if you really look at the underlying performance, the previous quarter was a little bit helped by MVNO, carrier service revenues and some MTR cuts. What you say is around minus 3% performance over the last three quarters. Nick has already said, essentially, we're paying the cost of some back book repricing on both the mobile and the DSL base, probably, also a little bit less than satisfying commercial performance. Mobile contract net adds were up 137,000 in the quarter. This is a slowdown versus the previous quarter. This reflects the stronger emphasis that we're putting on branded connections and direct channels. We have some positives there. Churn is coming down 1.7 points to 14%. So there is improvement, but clearly there is also some drag from past pricing. On the other part of the bar, the blue bar instead, we have a very good performance. KDG, plus 7.1%; this is an acceleration. We also added 123,000 net adds in the quarter which is a very good performance in the German market. On the Vodafone fixed line side there was a little bit of a slowdown. Here, again, there was carrier service contribution in Q3. Nonetheless, our DSL performance is still negative, but much better than the previous year; it was 47,000 negative versus 186,000 last year. So, some improvements, probably, the speed of the improvement has to be accelerated in Germany. In the meantime, Project Spring is progressing well. We said already that we have resolved the network issues of last year. We're now co-leader in 4G coverage, 77%. And I have to say, as Nick already indicated, our performance on the voice front is also very good with 0.57% drop call rate which is the lowest in Europe and the lowest, historically, in Germany. So recovery on track and, actually, I would say, fully done now on the networks front. Full-year margin, down 1.1 percentage point. It is improving in the second half. There is a lapping effect, because last year in the second half we started investing more in commercial. Priorities, priorities, clearly, the priority number one is to improve the branded mobile mix and the ARPU. So it's the mobile Vodafone side that has to improve. We want to accelerate also the VDSL part of the business. The KDG part, the cable part is doing well, but we need to accelerate also the other part. Continue to deliver, as Nick has described, the KDG synergies and complete Spring. But, on that one, I'm pretty confident that we're already in pretty good shape. UK. Now, UK is second quarter of growth in a row which is good. This is clearly supported by 4G. There's a lot of momentum in 4G. We have 1.1% mobile service revenue growth in the UK. As you can see from the bottom part of the chart, contract ARPU is up 0.9% and contract service revenues are up 4.5%. We have 3 million 4G customers. It's the highest-using market for data and also the best market for content and integration of content with our own tariffs. The NPS is also very good. On the enterprise front, revenues were down 2%. Essentially, we're still being dragged a bit by the fixed side. The mobile side is doing well. And Project Spring, here, again, has made a significant improvement. The 4G coverage that you see in the chart is 63%, but that's measured with the Vodafone statistics that are a little bit more restrictive or more demanding than the OFCOM one. In the OFCOM local UK comparison, that is more 71%. And here, again, the drop call rate has improved to 0.78% which is not as good as Germany, but still a significant improvement. We're reporting a 21.2% EBITDA. The underlying margin is not as good. There is some benefit from network settlements there and the margin is more 19.6%. This is driven essentially by two things; the fixed margin issue that I described before; and also, some reallocation of international network costs that we used to have in other parts of Vodafone and, actually, they pertain more to the UK. Priorities. Here, we need to maintain the great growth momentum in 4G, we need to continue to drive data monetization; roll out consumer broadband now in the summer and TV later in the year; continue to strengthen our network and our service performance, as I said, we already improved, but we want to push it to real excellence; and finally, build moment back in enterprise. Third, India. India is a good story, continues to be a good story. We have double-digit revenue growth. It looks a little bit lower than the previous quarter, but there is a 1.5 percentage impact of MTR cuts; on a yearly basis, that would be 5 points. Essentially, what is going on in India is the usual thing. Great growth of customers; 5.1 million customers. There is a little bit of voice decline in minutes of usage, but more stability in price. The voice decline in minutes of usage is essentially regional promotions that in some parts of the country are taking down the average. But, essentially, the great story continues to be a great data story. Data revenue grew 62% and volumes almost 80% in the country. We have increased the number of active data users to 64 million; it's 23% growth. And we have 19 million 3G data users in India; the same number here last year I gave you was 7 million. So, it's really a fantastic story of data growth, with a lot of potential to grow. We also delivered Project Spring. Here, almost 13,000 sites built in a year, 1,000 shops. So I would say, India continues to deliver. 29% EBIT - more than 29% actually, 29.6% EBITDA margin, growing versus last year, despite the Spring OpEx and the higher A&R, so a really good story. Priorities for next year; continue to drive data; expand 3G, after having acquired the new frequencies; maintain the network differentiation to support voice; do a bit of segmentation, again, on a regional basis, geographical basis and support with distribution in the different part of the country; and finally, scale up M-Pesa which now has a full distribution network and needs to be exploited commercially. Now, Italy. Italy is an improving story, as you can see in the chart and probably more improving also than competition. But it's still a challenged market. As you can see, we have improvement, essentially driven by a better ARPU in prepaid. There's stability quarter over quarter and improvement versus last year, but we still have a customer base decline, despite the fact that we're MNP positive in the country. We have a very good performance in Italy in enterprise and we have a very good performance in fixed. You see the number of broadband net additions, the blue part of the chart, continuously ramping up over the quarters. However, it remains a fragile landscape. I'm sure you'll have questions about Italy, but still 30% of the activity in Italy is below the line and below the line is incredibly competitive, so it can easily tilt in all directions. We're convinced that we have made the right choices. We have a very good 4G base. We have 2.8 million customers, doubled in the market. And we have more than 80% 4G coverage. So, in Italy as well you start seeing the progress, the benefit of Spring. Our fixed is going well; 6.8% growth in the country. We have prepared 5,000 FTTC cabinets which, if you add to the Metroweb homes that we can access through them, brings the total of the marketable homes to 1 million. And, of course, we have projects to expand it. EBITDA margin, also, the decline slowed down in the second half of the year. This is mostly due to very good cost control. So, priorities for Italy; we need to increase the commercial momentum in prepaid [Technical Difficulty], ARPU stabilization has been good, we need to do a little bit better numbers in absolute; increase the 4G penetration now that we have this full very well working network there; ramp up the NGN net adds, we have the plan to go to 3 million marketable homes by next year; and further grow enterprise which, as I said, is giving a lot of satisfactions in the country. Vodacom, a few words. They announced yesterday, again, another strong improvement in Vodacom. They are at now minus 0.2% which is 3.7 percentage points improvement. This is driven essentially by South Africa. South Africa went to minus 2%. If you take out the MTR cut, actually, South Africa is growing 2%. This is reflecting better prepaid ARPU and a more stabilized environment in South Africa. There is a big re-pricing that, as you know, we're doing and we have to go through in South Africa and, I have to say, it has been executed really very well. In the meantime, contract net adds up 13,000, 3%, but again, data accelerating; plus 25% of data revenues. And, as you see in the chart, we have more and more better devices. South Africa is one of the places where we sell most of our Vodafone-branded devices and cheap affordable devices with good intelligent bundled pricing. I will comment about on pricing later. Clearly and indicating that even in prepaid markets, even in emerging markets, there is a very good potential to grow in terms of data. The margin was down 1.2 points; but, in reality, after MTR it was only down 0.5 point. So, I have to say, quite frankly, a pretty good job done by our colleagues. Our priorities for next year; maintain the data leadership. We need to clearly continue on Project Spring, continue the price transformation. It's been successful so far, but we need to complete it, of course. Develop enterprise which is the next big opportunity in South Africa and launch our FTTH commercial propositions in the areas where we have access to fiber. International, I won't spend much time, growing again 5%. There's a bit of lapping effect with Tanzania. Growing customers. M-Pesa is the next thing. Is not, as I will say later, just a Tanzania thing, but we also are working in other markets. And finally, Spain. Spain, I have to say, graphically, there is an improvement; it's a small one, 1.1 points. I have to say, Spain remains a difficult market from an ARPU perspective, both in mobile and in fixed, due to these converged offers that are in the market. There are some pricing positive signs in the market. We had a negative performance in contract net adds; 41,000. This reflects our decision to reduce subsidies in February, a decision which has been followed by competitors, but only later. And we already have better numbers for March, so we think it was the right decision. We have a very strong momentum in fixed line. Fixed line grew by 4.5% ex-Ono. And we have increased our fixed line base by 26,000. We now cover 8.5 million households in the market; and this is, of course, Ono, plus the joint venture with Orange on FTTH. The Ono performance, as Nick has mentioned, is in line with plans. We have service revenues of minus 2% because of ARPU pressure, but growth in customers. And we also have - we will migrate the Ono MVNO customers who used to be on or are today, on Telefonica earlier than expected into our own network. We launched, in April, Vodafone ONE. Vodafone ONE is the full integrated response to Fusion. Early days to say how it goes, but indications are positive. In Spain, like in Italy, 2.9 million 4G customers; good coverage, slightly below 80%; and a very good performance from a network point of view. Priorities in Spain, we need to, of course, leverage now on the bundles to increase the value of the ARPU and lift up ARPU; grow our market share in the unified communication; continue the integration of Ono and the work that we do with Orange to add the fiber homes to the general footprint; and continue to deliver on Spring. And, again, this is another country where I don't have particular concern that Spring will not deliver in a positive way. So if I conclude, the six countries, I would say, in four countries positive signs. In one country, I would say which is Spain, okay signs, but still some room to grow, because we're still more negative as a market, not as a company, in terms of recovery. And in one market, Germany, we need to do better, but the market conditions are, quite frankly, not bad. Now, priorities for next year, let me describe the priorities for next year essentially through four chapters which are the first chapters of Spring. And they all follow the market trends. What we're seeing in the market is clearly great acceleration of consumer demand for data in mature markets and strong growth in emerging markets. This is addressed through the Spring network technology part. We see an increasing shift towards unified communications which is what we're addressing with our new capabilities that we have added and we're adding in convergence. And, I have to say, we see an accelerating demand in enterprise for international footprint and international services which perfectly fit our focus on enterprise. And these are the three main chapters of Spring. There is a fourth one that we have added now which is the commercial side of the story, the monetization side of the story. Of course, Spring is a great investment. But we also want customers to perceive it and so we're putting more emphasis and we will be putting more emphasis, on the customer side of the Spring investment to make sure that we monetize what we're spending. Let me cover them one by one. First of all, data and network technology, as I said, there is an acceleration of data. And Vodafone is today the leading operator in 4G in Europe. We have in the world 20 million customers or 18.4 million if you take out the dongles, so let's say 20 million devices, 18.4 million customers in the world using 4G. We have quadrupled our 4G base. In Europe today, 30% of data is 4G. Now, this is great, but this is only 13% of the customers. So the potential, the opportunity to really expand our services and, therefore, our revenues, is still largely untapped. As you can see from the right-top graph, usage is going up 60% year over year. It has increased throughout usage per customer to - throughout the year to 750 megabits, average. And this is a phenomenon which takes place both in emerging and in mature markets. In both segments we see growth every quarter. The shift from 3G to 4G, with the exception of Germany, where the increase is only 50%, is essentially a doubling. So when customers move from 3G to 4G, essentially, they double their use; exception, as I said, Germany. The driver of this is content and video. And, you remember, last year we said we would really bank on content and video. I would like to say that we could see everything coming. Of course, we saw most of the things coming, we couldn't completely see it, but we were right. Everything that has happened this year indicates that content and video is the right strategy. We have sold 4.1 million bundles, available in 12 markets now, against 0.6 million. So 4.1 million customers buy service with us which includes now content. Video usage is going up very fast. As I said, we couldn't exactly imagine which services would include video in their capabilities, but it is clearly accelerating. 48% of data traffic today is video. And the interesting part is the bottom part of this chart. First of all, customers who buy one content, not necessarily use more only of that content, but they also use more of everything else. This is the example of the UK, where people buy Netflix, people buy Netflix and actually they do watch a lot of Netflix; but the same people also watch much more Facebook, YouTube, Chrome and everything else. So, it is a self-reinforcing mechanism. And some of the new apps or the more popular apps these days, Snapchat, Instagram, here are examples, not only are growing a lot, but they're also creating upload traffic, not just download traffic. And this is the new thing I was referring to; upload is becoming important. I couldn't believe my eyes when I heard the statistics from the UK. In the UK, if you take all the messaging apps, so Facebook, WhatsApp, whatever, Google, whatever, 75% of the traffic today is Snapchat which means that the upload and the different way of communicating is actually stimulating a lot of usage. Which is why we're convinced that this - our strategy was right in going into bundling mobile and video. And the result is shown on this picture, where we have today 54% of customers using data. First of all, this is again for me the good news, is the right part of the chart, because there is still 46% to go. But 54% who use, one-quarter of these are already above 1 gigabit. Last time, some investors told me , yes, yes, but this is the usual few people, so you're building a network for the few who over use. So the right part of the chart is the answer to that; no, the median usage is also going up. So, yes, of course, the 25% use a lot, but there's also an increase in the median. And so, the combination of penetration and increased median usage will generate more revenue. How we commercial - how we monetize that? Through other pricing. The example on the bottom is the UK one, where you add £5 per block and you get always more and more and more which is a way to essentially increase ARPU in an efficient way; adding services, like roaming, adding content. And the quarter analysis now indicates a £1 to £1.25 per customer increase coming from all of this. Now, this is good. And this is clearly more of a mature market thing. In emerging markets, also we're seeing improvement. And, again, everything will be supported by better networks and stronger networks. Plus 22%, Nick said, increase in customers using data; 116 million active. To me, again, the good news is that 64% of the customers still don't use, so this is 116 million out of 300 million and we have an opportunity to really expand in an important way in emerging markets. The two examples on the chart I think are very telling. In South Africa, we have increased the data bundles sold in a year by 139%. So, again, the proof that you can monetize data in emerging markets, it can be additive to voice. And if you compare which, I declare, is not a completely perfect comparison, 2G to 3G Indian ARPU and is not completely comparable because these are not exactly the same people, but again it gives you an idea, the potential is 3.6 times increase of ARPU. So, a 3G customer is worth 3.6 times more than a 2G one. Not all of them will be able to afford, but some of them, a vast number of them, should. This is, I think, very good. M-Pesa is the last part of the data story in emerging markets; 20 million customers; 273,000 sales agents. Yes, it's a great story in Kenya. I will not bore you with Kenya, because we all talked about Kenya a lot. We're also successful in Tanzania. We're now in DRC; we're now in Mozambique; we're now also in South Africa. So, a good story on data, both mature and emerging markets, supported by investment in network, investment in 4G, essentially, in our markets and in 3G in emerging markets, for the time being; and then, expansion when we get frequencies and everything else. Second pillar of - and priority for next year, unified communications. First of all, basic information, where does Vodafone play in this arena? We play in the markets indicated in the chart which is essentially most of the European market. We cover today 28 million households directly and another 22 million through incumbent's networks via wholesale, so 50 million homes are today marketable in Europe by Vodafone. 25% of our revenues in Europe today is already fixed revenue. Again, the transformation of Vodafone into unified player is progressing well. We have 11.3 million broadband customers, 853,000 more than last year, 9.1 million TV; 5 million broadband NGN customers. What is our ambition? Our ambition and priority for next year is to become a unified communication provider. We have expansion plans. I don't want to go into details into the expansion plans country by country. And here, I have to say, we have to be adaptive to the local conditions. So in some markets we're building fiber and in some markets we're building fiber with an electricity company, like in Ireland. In other markets, we're building it ourselves, maybe with Orange, who is a competitor. In other markets, we're doing FTTC, like in Italy. In other markets, we're sharing with Portugal Telecom or we're doing our own build if the neighborhoods allow and the cost to connect is reasonable, like in Portugal. But essentially, we have a strategy to increase, as you can see, our marketable homes everywhere in Europe and continue with the transformation of Vodafone from purely mobile into a UC player. We today have four countries where we have integrated offers; Spain, as I said; Germany, for a while; the Netherlands; and Portugal. In the year, we will launch in four more markets; the UK is coming; Italy will be coming as well; Greece; and Ireland. So in eight of our markets, this year we will have quadruple play integrated offers. And, again, this will continue to push in the direction of being a full service provider into the homes. Moving to the offices, third priority for next year, enterprise. Enterprise, again, is a good story from Vodafone. We have 10.5 billion in revenues from them; it's 27% of the Group's service revenue. It's essentially an 80% Europe, 20% non-Europe story. And it's a story that we have built, thanks to Spring, leveraging on the brand, on one hand; and leveraging on the presence, a very efficient presence build by Nick Jeffery and his team, across different markets which we have really expanded in a massive way this year. We have added this year 28 countries in terms of IP-VPN presence. We now can be in 62 countries. We have 256 POPs around the world, plus 76. And we can serve, machine-to-machine and One Net, in 10 to 30 countries, depending on the product. We also opened four new data centers, two in Europe and two in Africa, to serve our customers with cloud and hosting services. The result is that we're back to growth in the fourth quarter in enterprise. It's 1.4% growth. It's growth that is coming mostly from the new and the more Vodafone-typical areas. First of all, Vodafone global enterprise, 1.8% growth which is, of course, very good. But it's also very good that the total contract value is going up 14% and the length of contract is also extended by two months. And this is a very important point. I meet a lot of companies, of corporates and they give us the credit that we're the essentially only very credible international provider for enterprise services. Interestingly enough, more than half, around half of the new propositions have fixed-line components in it. So, it's not just that we're serving whatever, Netflix and TV into individuals, but we're also coming into convergence from the other end, from the big names and we have indicated some there, plus 25% growth in machine-to-machine. Connections are up 33%. It's a small, but becoming more relevant, business. We're now, I think, in the range of EUR0.5 billion, probably, in terms of size or a little bit less, but growing very nicely. We're clearly betting on automotive. The integration of Cobra is going very well and it has been rebranded Vodafone Automotive. And finally, cloud and hosting, smaller business, 11% growth; launched services in Germany; opened new data centers. Again, back to growth. Not a huge business, but a business which is very integral to what we want to achieve in enterprise in the future. So, this is the third area of investment for next year. The fourth one is really the commercial experience of the customer. Now, this is, of course, in terms of money, smaller than the rest; but I think in terms of importance, it's much bigger. We really need to change the perception and we're changing the perception, of the customers. We're halfway through. This is the year when I want to make the difference. First of all, on retail, we have transformed 3,500 retail shops. We will continue the transformation. The results are pretty good. We have a very good increase in sales in the new shops across all categories. This is important because, yes, it's not only a productivity thing; it also allows to rationalize the others, i.e., reduce the margin of shops and reduce the cost, back to the topic that Nick was raising, of distribution through improved productivity of the high end and the highly invested shops. But also, most important, the customers are happy with higher NPS. Second area of investment is, clearly, also the digital. Digital is going to be the core. 12.5 million My Vodafone app users. We're going to enrich the app in a massive way, use it much more as a video, as a TV in your hands and as a contact mechanism also to reduce the cost and the context that we have in the real world. We already have today more than six average contacts per month through it. I think we can improve that. But, most importantly, we need to improve the number of people that use it. And the results are in the bottom part of the chart. If you look at the NPS leadership, we now have recovered NPS leadership in four out of six of the large OpCos. I will not tell you about the small ones, where we already have it. And in the two where we have not recovered yet, it's still not worsening. So I would say, the picture, from a customer-perception point of view, has improved in the year. It has improved more which is why we have increased this year the weight in our incentives, starting from mine. Customers' statistics/metrics, like churn, like ARPU, like NPS, like brand consideration will be weighted 40% in our annual reward system from everybody, from me down, because we need to make sure that the money that we're spending which is a lot of money, on Spring actually gets appreciated and recognized by the customers in their service; in their opinions; and, of course, also in their behaviors through churn and ARPU. So, four areas of focus in the year; data technology; mobile, 4G and 3G; unified communications; enterprise and customer experience. In summary, to wrap up both my presentation and Nick's presentation, I would say it's been a year of progress. We need now to increase commercial momentum in 4G and in NGN, both our own and the one that we resell; complete project Spring, I'm confident that it will be completed probably by the end of the financial year or around there. We have got a good performance in unified communications, enterprise, emerging markets. The focus for this year will be launching our unified communication products, including TV, in the consumer space and continuing the international expansion of enterprise. We returned to growth in Q4. As Nick said, our ambition now is to return to EBITDA growth, not just to service growth which I think is what shareholders care about. And deliver the cost synergies of the acquisition is very important. We had some good competitive performance in many markets, but not in all markets, I have to say. I really want all markets to show good competitive performance, especially the big six. And we confirmed our guidance and the dividend increase, 2%. We want to continue to confirm to meet guidance and to continue to increase dividends. Thank you very much for your attention. Nick and Steve can join me now for questions. We also have in the audience Serpil, Paolo. Nick and I would like to take this opportunity to introduce Johan. Johan, you don't need to stand up, because you're so tall that - actually, taller than me, that's not very respectful. Johan has joined us. He is the new CTO and will take over from Steve at the end of July and he's already in a kind of overlapping period to get up to speed.
Operator:

[Operator Instructions]
Steven Hurst:

It's Steven Hurst with HSBC. My question's really about Germany. Do you accept that this market is absolutely your key barometer, as it were? You've got consolidation that has happened, you've got relatively benign macro trends and you've got your rivals who are posting better figures and yet it seems to me that you're lagging rather badly here. Should we be making a comparison with the Australian experience, where the difficulties you had with your network caused years of underperformance? Or is that taking an excessively bearish perspective?
Vittorio Colao:

I think, Steven, you're completely - no, I cannot say that. I don't know what you're comparing. Let's be very, very practical. First of all, Germany, you're right, is a good market and is an important market for us. And it is our most important market, so it is - in many ways, it's also a very indicative market of the trends of the industry and in that sense we're positive. Our performance in Germany is not satisfactory for us, but is not coming from the network. I can guarantee to you the network in Germany works, the performance is much better. We had a hiccup which we have fixed by now and we will continue to fix and improve. It's not even remotely comparable to the Australia experience. Spectrum of availability is different; our network presence is different; the fixed line is different; the backbone is different. Technically, it's a completely different thing. As I said we have, Nick said, a re-pricing issue which, again, was not the issue in Australia. We have re-pricing issue. We have to re-price this and this is biting. If I have to be transparent, we needed to focus earlier on branded connection, Vodacom branded connection, as opposed to wholesaler and service providers and on the direct channel. It has taken a little bit of time. We have done a lot of stuff. Clearly, this network thing has created a bit of distraction. Clearly, KDG is doing very well, on the other hand. So, if you take a holistic German view, actually, we have not lost market share, if you put together Vodafone and KDG. But I'm not in denial; I'm saying on the mobile condition we need to do a little bit better. But I wouldn't put Australia next to Germany, please.
Steven Hurst:

No ,sure. But what I'm worried about is, is that still casting a shadow over the performance of the operations? It just seems to be - what was it? Really, you're saying it's purely commercial, at this stage?
Vittorio Colao:

I'm saying it's commercial. I'm saying it's commercial and it is already in the right direction. If anything, it's a matter of speed. For me, it's more speed than anything else. We're doing the right things; we need to increase the speed and the intensity.
Simon Weeden:

Simon Weeden from Citigroup. Moving smoothly on to another question on Germany, slightly rephrased. Actually, I wanted to ask about Germany and Ireland. Ireland seems to have deteriorated quite a bit during the year. Germany, as Steven was saying, is underperforming the peer group. I'm puzzled as to why they don't have the same re-pricing issue that you have. I guess, the question to me is we would expect to see some passive benefits from consolidation. Both Germany and Ireland have seen consolidation. Only two other network competitors - well, operator/competitors in both. Is this what passive benefits looks like or is that still to come? Is this what Project Spring benefits look like or are they still to come as well? That's on the Germany and Ireland question. And then, on Project Spring, I wonder if, since you've discussed and been prepared to float the idea of a possibility of a smaller scale Project Summer, at some later point, should we now be thinking that actually it's going to be much more about trying to make the Project Spring investment work better and Project Summer is maybe Project Autumn, some further way down the line, if it was ever needed at all?
Nick Read:

Maybe, Philipp does Ireland. But in terms of Germany, just clarification point, optically, it looks like a deterioration. But I think as Vittorio covered, in Q3, when, you remember, we came out with our results we said it was a particularly strong wholesale and carrier quarter and basically if you stripped out the abnormal performance there's about a 1.8 percentage points on quarter 3. Then you had an MTR adjustment in quarter 4, that's 0.2 negative. Broadly, we've been consistently sort of negative. The point about the back book is just to say our ARPUs were higher in mobile in the Germany marketplace and, therefore, addressing the current market pricing, we've had to move down further. So you're seeing within our consumer contract or contract ARPU, is down about 6%. I would argue, on net ad performance we've been doing well; it's just that ARPU back-book pressure that we're facing in Germany, at which point, throughout next year we'll still have a bit of that quarter 1 and quarter 2, but then you're going to see an improvement in the second half. I'd say that on Germany. I don't know if you want to - and then, I'll come back to Spring?
Philipp Humm:

Yes, maybe just to add on Germany, the key issue is, ARPU, we have taken necessary measures, expecting H2 to see some improvements. On Ireland, it's really two factors. One factor is we had the year before a big MTR settlement which is obviously going positively into last year and is a drag now on the year-over-year comparison which is coming through. And we had also, from a business point of view, were under attack in prepaid area, where we lost some share which has been fixed in the meantime with a new lineup which is in the market and is doing quite well. So I think, going forward, I'm quite positive on the Irish market.
Nick Read:

Sorry, just in terms of Spring and then returning to the capital intensity of 13% to 14%, I'd make a couple of observations. We're building a fully modernized, efficient mobile network post-Spring that has been sized for high data growth going forward, both on the, you can talk about it more, backbone and backhaul. When you're looking at 13% to 14%, what you have to say is within that number, broadly speaking, the mobile is about 12%. So we've returned to about 12% which was higher than our normal mobile spends, even though we've done all the work we've done in Spring. That fit sits around about 18% which, I would argue, is in line with most cable companies. I think it's appropriately positioned for what we need to do, going forward.
Akhil Dattani:

Akhil Dattani from JPMorgan. Just a couple of quick follow ups. Firstly, if I start on Germany, again, if you don't mind, on Germany, if I look at the KPIs that you've reported, it does look now that your year-over-year ARPU trend has stabilized this quarter. I guess, just to Philipp's point about the H2 improving message, should we now think about the back book having been largely re-priced? Is there more headwinds? Just how do you think about that H2 outlook? Secondly, on unified communications, Vittorio, you mentioned how pretty much all your major markets now have been addressed on that front. I guess, one of the interesting things we've seen this year is some of the fixed-line only players moving into mobile through acquiring assets, so shifting away from the historical MVNO-type strategy. Just interested to get your perspective on what you think has been the catalyst to force them to go infrastructure based, whether you think this will become a broader trend going forward? And then, very last question is just, looking at your organic service revenue trends versus your organic total revenue trends, historically, they were very closely aligned the last couple of quarters, total revenue is growing a lot faster than service. What I would just trying to understand is, is that just high handset sales and that's it? Or is it a lot driven by this leasing change? If it is leasing, how should we really be looking at things? Should we be focusing more on total versus service? Or how would you really think about the message there? Thanks.
Vittorio Colao:

I'm happy to pass the first and the last question to Nick, especially the last. I'll take the strategic on unified.
Nick Read:

The quick answer to the German one, I think I covered it which is to say I don't think you'll see a quarter-over-quarter improvement in service revenue profile for Germany in Q1. But from that point onwards, you should see a steady improvement as we lap on the book. On the third point which is, yes, you get a degree of handset sales. South African can spike up sometimes in terms of total sales versus service revenue. The handset financing we're doing is predominantly in Spain. In November, we moved in line with the rest of the market in terms of our commercial model. That had an impact in terms of Spain in the second half in terms of EBITDA of a positive of around £100 million. Obviously, as we role forward - and there is a little bit in Germany, but nowhere near the same order of magnitude and we've been doing it for quite a while. I would say that when you look into next year, therefore, there is a drag effect that we get from handset financing in terms of our service revenues of broadly £160 million.
Vittorio Colao:

On the strategic question, what is happening on the fixed side, are they changing their mind after BT and Belgium and everything else, it's a question for them, essentially. But my interpretation is that, as we said many times, you should never exaggerate one side of the argument, so mobile is good, fixed is good, mobile is bad, fixed is bad. The reality is that convergence is a fact of life. There are cost savings and there are opportunities to deploy services and to manage customer experiences which are clearly better when you control assets. It goes without saying that many of the complaints or the litigious positions that we're taking with incumbents is when the incumbents make our life miserable because they don't like us to basically compete with them. As much as we try to buy either the cable or build the fiber or control the customer experience on the total side, I imagine that they have exactly the same issue on the other side. And since this is justified by important cost synergies, I predict that this is a trend. And probably not just for Europe. It is a trend that has started in Europe, but I hear that even in other markets now people start thinking about what the future will look like. And, again, this makes more interesting the whole landscape, because there's more combinations possible.
Unidentified Analyst:

Two questions, if I may. The first is just around your margin ambition. It was great to see some more clarity on the ongoing opportunity on OpEx. We just saw Numericable in France which owns about one-third of homes with a fiber network and a national mobile footprint, guiding for mid-40s EBITDA margins with pretty similar footprint. Obviously, in Germany and Spain, where you have a similar mix of assets, your current margins are more in the high 20s, low 30s. Is there a step change possible in industry cost structure that companies like Numericable are discovering? And should you even be raising your ambition further on longer-term costs? The second one was really around Group structure. I just get the sense, when you look at enterprise, there's real synergy to being global. I wondered, if you were to break up the Group in some way, how big would the dissynergies on revenue and costs be?
Vittorio Colao:

Well, both questions for me. Second one is I'm not considering breaking up the Group. I think enterprise would definitely suffer. Can you manage it in other ways? Listen, historically, all the telcos in the world have tried to do alliances to serve international customers. I can tell you, it's very hard. It's very hard. Even us, we have our own 60-something countries, plus we have the partner markets and it's difficult to coordinate through partners and something. I think, Nick and I myself sometimes get involved into, we should call this guy, who's a partner there, because he's not delivering, what happening in the larger accounts. It's complicated to do it not controlling your own people and your own offers. It would be a dissynergy, clearly. And the other dissynergy could be purchasing. Of course, there are other ways that you can deal with it, but, again, same story. So we're not considering it now. The dragging question is very, very interesting. I can tell you, all the CEOs of the telcos in Europe, we're scratching our head and we're thinking about it and we're talking and meeting. I have very open position on this. First, it is true that we need to rethink as operators, continuously, the way we run our business. We're doing it. We will be doing. We continuously will be doing. And it is true that we need to take some different approach to costs which I think Nick is leading and is leading in an effective way. We're seeing also, our emerging markets, how they manage things, sometimes differently and, again, this is progressively coming into it. Second, however, it also depends a lot on which business you want to serve and for how long. There could be areas where excessive reduction of redundancies and robustness and so on, enterprise is one, but not just one, overtime can create, clearly, problems. So it depends on your time horizon. If your time horizon is three or four years, maybe it works; it's 10, maybe it doesn't and then you end up underinvested. There are other companies and I don't want to name them, that three or four years ago they were mentioned as the great cash flow generators and dah, dah, dah and they had eventually to sell assets to remain in the business. So we have to be consistent with our long-term orientation, but not in denial. The third thing is we have to learn and to be open to look at what they're doing, if it is significantly different. We have sometimes interesting, because SFR is a partner market with us, so we're exchanging ideas. And it's interesting that they remain a partner market with us, so we must be buying at good prices, right.
Andrew Beale:

It's Andrew Beale from Arete Research. I just wanted to dig into the EBITDA guidance for this year. Nick, obviously, gave us that waterfall chart which said £100 million to £500 million [ph] of organic improvement. I just wondered if we could just dig in below the surface and look at some buckets, maybe on a qualitative basis, rather than actual numbers. First of all, revenues, you've got a mix of growing and declining businesses. Are you expecting a net drag in gross margin or gross profit terms from revenues still again this year or is that neutral to positive now? Secondly, in terms of net cost reduction, what is that year over year? What are you expecting? Thirdly, in terms of the Spring OpEx, is that still a significant year-over-year drag? The other one, I guess, the handset financing. What EBITDA boost are you expecting from that shift to handset financing in the coming year? And finally, I guess the delta is going to be commercial spending. Is that going to be up significantly?
Nick Read:

Well, I won't complete the full spreadsheet on the stage, but what I would say is that clearly we're back into top-line growth and we would expect that momentum to continue. I would point to quarter 1, quarter 2 as having a number of effects that will mean that the quarter-over-quarter improvement will not be as great as experienced in quarter 4, because we're lapping on the India price increases that we did; we're lapping on the Italy price increases that we did. So I'd see it slightly moderated in the first two quarters, before then slightly reaccelerating in the second half. Obviously, that then impacts gross margin, so it's a flow-through effect. I would say handset financing is actually a negative on the EBITDA next year, within the number. That's a negative of about £100 million drag upon EBITDA. And I would say that OpEx, we're working very hard. If you stood back and looked at it on a regional basis, I talked about the second half of Europe being down £270 million and we would expect that to be moderated in the first half of the year and then AMAP continuing to perform at similar levels. H1 of this year, they were up £100 million EBITDA, second half up £130 million; I'm expecting a similar type performance in the first half. That's about as much as the spreadsheet I'm willing to go to.
James Britton:

It's James Britton from Nomura. I've got one question on MVNOs and another one on handset costs. Firstly, on MVNOs, you've been very disciplined on 4G access for MVNOs. Are you a little concerned that other operators aren't following your lead in quite such a disciplined way? I guess, specifically, I'm thinking about the recent launch in the UK which suggests that the cost of capacity available is actually still quite a lot lower than retail prices in the market. Second one, on unit handset costs, are you expecting much inflation in unit costs this year as the handset vendors manage their exposure to the weaker euro? If so, do you see that as an opportunity to re-price and squeeze gross margin higher? Or do you see it as a challenge, really, to capture your share for higher network service?
Vittorio Colao:

Okay, let me pass the second question to Paolo, who has time to think, while I reply to the first one. Listen, on MVNOs let me reiterate two things that I strongly, strongly, strongly believe. First, MVNOs are not necessarily bad, as long as you price intelligently to them which does not mean overprice; it means price intelligently which means not allowed to use your own network capacity as a marketing tool to acquire customers and then when they do something else at corporate level which is, again, a different version of the same game of service providers and all these things. So, we have been disciplined. We're gaining some 4G MVNOs things. I believe two, probably, in the word; one, yes, I don't think is announced. We don't know. We'll see. But again, it has to be in mutual interest. And I'm saying this to say we're not structurally thinking it's bad; we think it's bad when it's done as a bulk deal. And a bulk deal is dangerous, because bulk capacity gets sold or actually mis-sold, very often. So, that's the first point. Second point, how will we react if there is a third player which could by in UK, in Italy, in Spain, so on, who decides to be more liberal. In the end you have to make a decision. If you're convinced that you have a good network, good service - and that's why we introduced the fourth element which was the strong commercial and customer management, customer experience thing. If you're convinced that you have a good one and that your network is good and that your service is good and you're able to bundle content in an intelligent way, you should not be worried if somebody else gives it away for nothing or for a low thing, in the end this will not hurt them more than it hurts you. And I think, over time, this will be very apparent and very evident in some of our competitors. If the market completely commoditizes then, of course, we will have to change our views. But our current structure is not to go for the commoditization, to go for an intelligent pricing of data, eventually working also with MVNOs, if they are willing to accept our pricing philosophy.
Paolo Bertoluzzo:

We don't see any major shift, driven by currencies here. The key point is that there is a mix effect. And you have the high-end new models, for example, the new iPhone or now the Galaxy, coming out and trying to again pull up the margins for them and this is a normal dynamic and us doing a little bit the opposite in the lower end of the market with our Vodafone-branded devices, both in Europe on 4G and 3G in emerging markets, to try and drive down the accessibility for 3G and 4G for our customers. And that's a mix effect, more than a currency effect. I think what is really important that you know and understand is that more and more we're looking at the business, regardless of how then we do the bundle price, as a separate business in between what we get for our services and how much we get, we charge the customer, for cost of the device. And that's actually the way we look at the business now and we run the business. Every month, for example, we look at the net revenues, the net margins that we bring into the company with the new acquisitions net of subsidy. Therefore, this dynamic is more and more something that we pass to the market and we manage separately.
Andrew Beale:

Can you share with us whether that net number is actually tracking the service revenue growth number? Or is it slightly below, because handset costs are going higher?
Nick Read:

If you're saying are handset costs going up and are we having to take that hit, the answer is no.
Vittorio Colao:

The answer is no. Paulo is saying, we try to be neutral to that. And regardless of whether we have a model in the market which is split handset, whatever installment, the philosophy we're trying to drive is, we don't make money on the handset; what we make is the difference between what we get and the handset cost.
Unidentified Analyst:

First of all, on Project Spring, I guess, a question for Steve, so great coverage at London Bridge in the evenings, not so great in Gatwick. That's the first part of the question. But when exactly does Project Spring end? I think Vittorio said around March 2016, is it before or after?
Vittorio Colao:

It depends on the country.
Unidentified Analyst:

I guess there's a concern out there that Project Spring will leak into FY '17, so that's really the question. Does it end in March 2016 or will it continue a little bit further than that? And then, within that, I notice some of the data session numbers that you give have improved a little in Spain, some of them haven't. I'm just interested also into what the dynamics are of how that data session, more than 3 megabits per second figure which is quite important for video, what's driving the quarter-on-quarter development?
Steve Pusey:

Do you want me to take all of those?
Vittorio Colao:

Yes.
Steve Pusey:

First of all, Project Spring will, as Vittorio said, country by country. Some countries will actually finish early. Two countries, I think will just edge over. Germany will edge over for 4G coverage. A choice we put more into voice and fixed for a period, but that's all within our own plan. The only country that will edge beyond this is UK, where it's been more challenging than others to deploy fast. But we're catching up, as you can see by the stats. To your very point, what's the second or the remaining part of Spring, I would say it's the simple focus on complete the data coverage, 3G in a lot of emerging markets and 4G in Europe. Very clear, very simple and focused; and complete the voice holes which are more prevalent in the UK than anywhere else. In the rest of Europe, it's largely, in the map, three r's, road, rail and rural and completing those irritating pockets, filling them in so as we get the contiguous service. UK is dramatically improving. And we're focusing very hard to fill those holes in, as you're starting to notice which is on the positive side, I hope, one by one as we go through there. So that's very good. In terms of the 3 megabit consistency, driven largely by getting footprint coverage consistent and with the associated backhaul and it's a simple coverage map. You have to get, for 4G, the 800 megahertz out there to get it consistent. We can put performance on top of that, if we want to get the peak speeds up which a lot of the journalists talk about, of course. But more important for us is getting that base level of high-definition video, the most challenging application, to cover consistent everywhere. And that's our goal of getting to - you can see for the larger markets, Spain up into the mid-80s now. All the markets will be beyond 90, before we finish this.
Unidentified Analyst:

But is there a reason why Italy and Spain show improvement, where Germany and the UK don't? I guess, you answered the UK to a degree, but what's the problem?
Steve Pusey:

It's just percentage of coverage, as the coverage goes up.
Vittorio Colao:

You picked the most difficult place to intervene.
Unidentified Analyst:

And can I have just one cost question? Nick mentioned the [indiscernible] driven work, IT going down from 5.5% to 3.5%, I think you said.
Nick Read:

3.5% to 4.5%, yes.
Unidentified Analyst:

Okay, so that could be uptake £100 million of savings. Could you give us a timescale? I might have missed it.
Nick Read:

Three to five years.
David Wright:

It's David Wright from Bank of America Merrill Lynch. I had a couple of questions, please. The first one, just on the CapEx, 13% to 14%, you mention the 12% to 18%. If I just run the back of the envelope and do 18 fixed at 25% of service revenues and the 12% at the remainder I get exactly 13.5%, so I get that one 100%.
Vittorio Colao:

Well done, Nick, you can figure it out.
David Wright:

But if I adopt my advanced math, it suggests that you run over 14% when you get to one-third fixed sales which is probably not too far away in your ambitions, I would have thought. My question is as the fixed starts going up does that CapEx reach 14% quite quickly? And then, if I could ask a second question a little bit independently, please, just on India. One of the EBITDA range drivers that you've given is Indian pricing. We have some commentary from both Bharti and Idea that they've actually started becoming more competitive again in mid to low end earlier in their full-year transcripts; I wondered if you had noticed that and were reacting to that.
Vittorio Colao:

Serpil, you take the India question. Nick?
Nick Read:

Yes, I think just a couple of points on the 13%, 14%, again. 13%, 14% is our central case that delivers £1 billion incremental free cash flow by year five. Clearly, if we have markets that are over performing and, let's say, it's fixed success CapEx, then, obviously, that proportion would go up. So I think depending on how you're arriving at your numbers depends on what movement we would see, but it would be success-based CapEx.
Vittorio Colao:

Serpil, India?
Serpil Timuray:

On India, our basic growth story is coming from customer growth, on one side and on data growth, on the other side. Market has been quite saturated in terms of price increase capability this year and we do expect that this will continue for next year. So, basically, our growth is coming from more on data this year and that's our projection for next year as well. You have to realize that in India this is a circle-by-circle strategy. In some circles we're the leaders, in some circles we're the challengers, so there is mix effect. And so it's a really a regional play and we're very carefully monitoring that.
Polo Tang:

It's Polo Tang from UBS. Just have two questions. Firstly, what are your thoughts in terms of the acquisition of BASE by Liberty Global? And do you think potentially Liberty Global should look at acquiring you, rather than the other way around? Second question is really just for some more color in terms of Germany, just a generic question in terms of how you're seeing the competition behave and respond in the current market environment. And specifically, in terms of MagentaEINS, the converged bundle from DT, any impact on Vodafone? Thanks.
Vittorio Colao:

Yes, Polo, let me tell you, first of all, a question whether Liberty should acquire us, I think it's a question for Mike, not for me. I can give you a big price, if you want, but really it's not a question for me. We always look at assets. We always look at opportunities to integrate. And again, back to the question on putting things together, it's a matter of synergies and it's a matter of convergence relative to the market needs. Some markets are already showing needs, other markets are not and you have to judge whether the price reflects both or not. So, that's the only answer I can give, apart from the joke. On color about Germany, I would say it's a good market. We're seeing positive signs of competition. If anything, there's a little bit - I hope I'm not paranoid, but I'm paid to be paranoid. I see Drillisch and the interaction between Drillisch and one on one, potentially dangerous because they can come, they came with this too low offer, Philip one is 19 and the other one is, I don't know, in the mid-teens which can drag a little bit down. When I met investors six months ago I said, I remember very neatly, I had a chart and I said I don't think the problem is the behavior of the big players; the problem is if these, again, back to the MVNO question, deals allow people to go really a little bit crazy to get market share then the reaction from the others becomes more unpredictable. But, in general, it's a good market. So we keep the eyes on the low end, but, in general, the behavior is positive. MagentaEINS is priced intelligently, is a good pricing. I think they have moved a lot of customers into it, rather than acquired. But, again, it's something that I see, in the end, as positive. I cannot say we have seen an impact from it, because I think it was more of a customer base thing. But it will have an impact and, therefore, we will have to respond and have our own products in that space. Philipp, any further comment you follow?
Philipp Humm:

Yes, maybe just to add to MagentaEINS, I think overall we have not seen an impact on our base. We're focused very much now on cross-selling cable, in particular, into our mobile base. We have so far about 255,000 customers who are on our bundled product. Deutsche, I think, is in 475,000 so far. And we're ramping up the activities also here to drive up cross-sell in to our fixed-line base with mobile.
John Karidis:

It's John Karidis from Stifel. I'm basically after some more color on two issues; handset financing and fixed line in wholesale access. On handset financing, could I ask Nick maybe to repeat what he said about the number of benefits in H2? And can I ask you to give us a few-second tutorial on this? Is it a bit like what we see in the States, whereby you recognize the full retail value of the handset at sale and there's also no handset subsidy? And then, in terms of wholesale access, could you please, Vittorio, talk about - I guess, talk a little bit more about the you see the challenges, if you like, of that, specifically in Germany, Italy and Spain?
Nick Read:

I think the short answer to handset financing is just second half worth around £120 million; £100 million of it in Spain, so Spain is the major market where we've made the model shift.
John Karidis:

In what, EBITDA?
Nick Read:

Yes, in EBITDA. And for Spain, it's effectively a split model where we're recognizing the margin of the handset sale upfront, so just pure sale and then, basically, we're spreading the cost of the handset, rather than booking the full cost of the subsidy in the month we acquire customer. So that's why you get the EBITDA benefit in the year you're doing it; and then you get the unwind effect in the subsequent years which is why it's a drag next fiscal year.
Vittorio Colao:

Let me comment on it and then I move to the wholesale question. I have to tell you, honestly, John, I don't know what it is. I look - as Paolo said before, I look at net now because the way I think, with this industry has been this concept of subsidy which a bit of a strange concept. The reality is customers give me money and I give money to Tim Cook or to Jay Lee or to whoever and I should look at the net, because all these different models will reflect different market conditions. In some markets, it's financing; in some markets it's split; in some markets it's below EBITDA and some competitors also account in funny ways. At the end of the day, my simplistic view is cash is cash. You look at what the customers give you and I take - when I go into the shops which I do often into the markets, any market, I take the price and multiply times 24. I take away the cost of the handset and that's my money; the rest is something that I pass to somebody else. How it is accounted for, I'm very glad I have Nick next to me, because the creativity of accountants is fantastic. But it's important that we get this, because it's the net that matters. People pay for - and we also need customers to understand that when they say, I'm giving to Vodafone £43, you're not giving to Vodafone £43, you're giving to us £20; £23 go to [indiscernible]. So please be thankful to me for whatever, the extra gig that I give you. And this is more of philosophical point. Wholesale, different situation and different markets. Our position and this is the position on which, as I said, we're increasing a little bit our competitive position, is that we want access to wholesale, because we all know that it's impossible to cover all the areas; we want it at a decent price; and we want it at good operating conditions. And the good operating conditions are almost as important, if not more important, than the recent price. I got some statistics yesterday from my colleagues, the Head of the Cantors [ph] in Europe which in some countries are frankly horrendous. We have some cases where there are 60% turned down to our request. Now, you cannot possibly think that six customers out of 10 that we're trying to get are technically non-good. We get, in another country, 200-and-something hours for a technical intervention, a fault repair. Now, if you're at home and you wait for 200 hours, I can tell you. And so on all these things we're going to become very - and I've already gone to Brussels myself showing the papers and saying, this is the next thing. Now, having said that, not everybody is the same. There are more moderate positions and more, I would say, cooperative positions in Europe. So you refer explicitly to Germany, Italy and Spain. I would say it's the right order; Germany, Italy and Spain. In Germany, we have a constructive dialog with Deutsche. It's not perfect, we're not completely in alignment with them. Again, a lot of discussions. We're trying to improve our access to the contingent model. There's a big discussion about vectoring. They want to do this 500 meters vectoring which has some competitive implications. But we're positively engaged. The Italian discussion is polluted by the Metroweb saga which is a nice attempt to slow down and reduce competition. Of course, we will not play that game. Spain is probably the most difficult environment where we had to go together with Orange and we will share our joint capability, because not only on the fiber front, but also on the content front, Telefonica is closing up the fortress, again. And content is going to be the next one.
Guy Peddy:

It's Guy Peddy from Macquarie. Just a sort of slightly big picture question. You spent vast amounts of money on M&A in Spain and Germany; you've also spent a lot of money on Project Spring. But in both of those markets you have a competitor that in Telefonica is closing shop or in Deutsche Telekom is just clearly executing materially better. Do you think that throws into jeopardy your strategy of trying to be a big, one equal? Can you actually get there? The way I'm thinking about this is if you price closely off the incumbent, don't you give the consumer even more reason to actually go and take the incumbent's services? So, have you thought about actually saying, you know what, it's not working in those markets, we can't compete with the incumbent, we need to start running those assets more for cash now and actually, therefore, moderate your long-term expectations?
Vittorio Colao:

No, again, it's a bit like the previous question, I have to push back a bit on this. I don't think that it's correct what you're saying, that it's not working. It's true that you say in Germany they're executing better in mobile. But if you look at our total share, in Germany, actually, we're stable. So I would say our strategy is working. Our big strategy at a higher level is working in Germany. Again, I'm not in denial and I'm not hiding behind anything and saying there are elements of our execution which I would like to see in a faster implementation mode. But I don't think that's true. If I look at Spain, in Spain, if I look at the last quarter, honestly, of all the players who are the ones who have lost less revenue versus the previous quarter and in the previous quarter we were not the worst, again, in the previous quarter we're not the worse; in the previous quarter, we're at not the worst. So you take the quarter-on-quarter evolution of our revenues in Spain, is actually not the worst. Now, the worst is depending on the quarter somebody else. It doesn't seem to me that it is not working. It just seems to me that some - for market conditions, ARPU has been taken in Germany to levels which are not constructive. Now, good news, there have been pricing moves in Germany recently. We have made some moves. Others made other moves. We see where it goes. Consolidation is taking place. I don't think that it is a case that you can say it's not working. It is challenging, from an industry profitable perspective, I agree with you, but I wouldn't say that it is not working. At least, it's not what the numbers indicate.
Robert Grindle:

It's Robert from Deutsche Bank. In the UK, you said convergence is a fact of life, but not really for your UK consumer customers. Are you going a bit more slowly with your fixed broadband approach in the UK? And is that because of caution about the changing regulatory environment or even opportunity due to the changing regulatory environment? Secondly, it's back to Germany, I'm afraid. That graph showing the Germans don't use as much as other Europeans when they go to 4G, are you seeing signs that Germans are more price sensitive on data or even low users of data, just as they were for voice?
Vittorio Colao:

Yes, Robert, let me go - start with the second question. It's one of those things that I've been scratching my head for 15 years and I came to the conclusion that we're different. And why do Germans write letters and don't call, call centers, I don't know, but that's the reality. Why do Germans use less minutes of usage? I'm talking about the old thing? I don't know, cultural, the way they commute or organize, I don't know. And it seems to be the case with data. Maybe you can help me on this one. I tried to look into the transcripts of my competitors' calls when they talk about data and content. It seems that content in Germany was a bit less also for others. I don't think Netflix is a big success in Germany with anybody. I don't know. There could be something or it could be that maybe we need to improve our marketing capability. Again, back to the previous question, I think we need to learn and not be in denial on anything. But my sense is that there is something a little bit more quiet, more conservative. I remember, SMS, in my old days, when I was sending SMS like crazy in Italy, I was wondering why it's not the case in Germany. There is something probably in the consumer which is marginally different. But we're watching and if you can prove me that there are opportunities by listening to competitors or doing something, very happy to consider. On UK, the other way round; we're more determined to go into broadband and we're more determined to go into TV and content. We will - as I said, we have confirmed today that we're launching our broadband offer over the summer and we're launching our TV offer later in the year. And it will be a modern cloud-based appealing TV offer which, of course, our competitors will fight against and will try to limit our commercial reach, but hence my comment about regulatory conditions. But it's very important that this market continues to be as competitive as it has been in the past.
Maurice Patrick:

It's Maurice from Barclays. A question on M&A, you talked about high EBITDA price, ARPU recovery in Germany later in the year, you mentioned some of the pricing increases in Spain. Do you think too much ARPU repair might put off some of the recent spate of consolidation we've seen, so the helpful forward of the consolidation? If you read some of the comments from Commissioner Vestager, etcetera., they seem to be quite hawkish on price increases or perhaps put the other way, do you think we should be thinking less around price increases and more about ARPU growth? And do you think some of the regulators can differentiate on them?
Vittorio Colao:

Both, both, that's your super-good point. First of all, what I said to Commissioner Vestager is it's not about price increase, it's about return on capital. Consolidation is good, because shrinks the capital base. So same money produced by the market, you increase the return on capital; is not about increasing prices. And second, if you think about what we just discussed, we're saying that customers are using 50% more data, all. Germans are actually using only 50% more data; the others are using 80%, 100% more for marginal, positive ARPU increases. So prices, defined as unit prices, are actually going down. Spending is going up, because people use it much more. But I think this is the type of speech, the narrative that we need to use with the commissioners. And they need to accept it because this is - you just saw the numbers. This is the true representation of what's happening.
Ottavio Adorisio:

It's Ottavio Adorisio from Societe Generale. A couple of questions, the first one is on Ono. It looks that this quarter - or this year had an EBITDA decline of in excess of 20%. I believe that some of it is probably integration costs. If you can just say how much of this was accounted and what was the organic growth, considering that you were looking for stable for this year. The second one is that on integration costs you booked around £360 million for this year; that is a more than 50% increase from last year. I reckon that as, again, Ono has contributed. So if you can tell us for next year how much you would expect in terms of restructuring and integration costs, whatever you want to call it. And the third is it's basically a sum up or follow up from many questions you received on fixed CapEx. Now, on the chart you show in terms of your unified communications strategy you have quite good trends. But undeniably, you lag well behind the integrated incumbent in terms of NGN marketable homes. Now, a follow-up from the answer you gave to a previous questions when you benchmarked three different markets in Europe and you say that Germany's actually the best vis a vis Italy and Spain in terms of wholesale access conditions. Now, looking at your pricing strategy in Germany and you have a big difference between the pricing you offer for quad play in the cable areas, KDG and where you actually have to access Deutsche Telekom network and therefore, you have to rely on that leasing strategy. So I assume that, as you said, it's all down to net; because you have to recover the cost, you're actually pricing it can be higher. My question to you is that has all the integrated operators over the last 1.5 years have been stepping up the CapEx and they're actually increasing their coverage? Therefore, you will be facing a significant bigger battle in terms of with your bundle in areas where you don't have cables that are limited to parts of Germany and parts of Spain. Are you going to, basically, waiting for wholesale pricing to come down at some stage? Or you will be more willing to actually invest on the CapEx, therefore, to be more aggressive with your NGN rollout? Thanks.
Vittorio Colao:

So you take the Ono questions and then Philipp and I will get the second part which is more strategic question.
Nick Read:

Yes. In terms of the organic EBITDA excluding restructuring, I suggest you see me afterwards. And I have a number, I just want to verify. On restructuring, yes, in cash terms it was £336 million this year, plays against last year of about £210 million. Look, we don't guide on restructuring costs going forward, but something along those lines again for next year.
Vittorio Colao:

Yes, on the second part of the question, first of all, I don't recognize some of the statements behind your question, so maybe, Philippe, you can comment about the cable, no cable thing. But let me say the broader question. The broader question is the fixed incumbents are expanding their coverage. What are you going to do? Are you going to use their own products, not making money or making little money or are you going - is this going to drive further build on our set? And the answer will be it depends. At the end of the day, if I'm using somebody else's network I'm saving CapEx and they're putting the CapEx down. Yes, I have lower margin, but I have also lower capital invested. If I have opportunity, as I said before, take the example of Portugal, of building at relatively low cost, I would be building. If I have the opportunity, see Ono, see KDG, to buy a cable network at a value where I can see the synergies justify the cost, I will buy. And if I don't, I will just use the wholesale network and, hence, I will be very committed in getting good price and good access conditions. But I don't see that as a strategic problem, if you want. I see that as, as I always said, a make versus buy decision that we have to do country by country. And, to be honest, it changes over time. Because from time to time, incumbents change their mind and I can mention several examples. I can mention Portugal, for example and they say, you know what, return on capital in those areas are not very good, come on board with me. And Italy, in theory, should be another case. So far it's not, but it will probably become a similar case. So it's not an impediment. It will change a lot the amount of capital versus the return, but in the end the return on capital will be the important metric. On the split, cable, non-cable, Philipp?
Philipp Humm:

Maybe just to explain, as a mobile player we're national and as a cable player we're regional, so we're always faced with the situation that we need to have a national proposition. Now, if you take the example in Germany and I'm more than happy to share the details, if you want, a bit later, all the pricing of cable and copper are 100% aligned. So it's - and the general strategy we have is we're more or less trying to sell at the same price point a faster speed on cable than on copper, because cable as a product is superior and allows us to move away customers from buying copper. Where we don't have a copper - don't have a cable product, we're obviously then a bit more moderate there. But we're on exactly the same price level across the board.
Ottavio Adorisio:

So you basically confirm that you have the same pricing for the bundle you have on the KDG areas vis a vis --?
Philipp Humm:

Yes.
Ottavio Adorisio:

Because I checked it out, it looked to be the case when I went in to the website.
Philipp Humm:

Yes. No, sure, same and I can, more than happily, share that.
Emmet Kelly:

It's Emmet Kelly from Morgan Stanley. Just two questions, please. Firstly, a question for Nick. Nick, could you just comment a little bit on the UK EBITDA margin and the reallocation of costs; where those costs were beforehand and what the outlook is for that in the future? The second question, Vittorio, is on the Italian market which hasn't been discussed very much this morning. I guess, in the past you've made super-duper profits in Italy, if we go back 10 years and obviously the market's been pretty beaten up over the last six or seven years, in particular. Where do you see Vodafone Italy in a year's time? It looks like maybe the pieces are coming together there. It's one market where you've really ramped up your LTE coverage very, very quickly over the last 12 months. There's no cable in that market; there's limited fiber as well. It's the opposite of Germany as well insofar as you've got very high historic MOU and also SMS. Are these all positive indicators you think for LTE in Italy in the future? And how does that market work in terms of handset subsidies, going forward? Is that a bit of a deal breaker for LTE take-up, do you think, given that it's a market where customers traditionally purchase their own handset? Thank you.
Nick Read:

The quick answer on the UK is Project Spring was us expanding our enterprise footprint, capabilities, products and services. And we took the opportunity, as we were expanding and making investments, to sit back and say how did we want to allocate some of these costs across the Group. And, of course, if you it on something like enterprise service revenue, the UK is a very big enterprise business and, therefore, it attracted about £100 million more in terms of its allocation. So, these aren't necessarily incremental costs to the Group; it was just an allocation key that disproportionally hit the UK business. If we exclude this and exclude the settlements made which were positive, you'll get into a flat EBITDA margin for the UK.
Vittorio Colao:

Yes, question on Italy and where is Italy going and especially where is Vodafone Italy going, two different questions. Where is Vodafone - where is Italy going? I have to tell you, this is the pricing table of Italy. The specific thing that is not in any other pricing table is that we have a distinction between above the line and below the line. And below the line, we have a EUR5 offer from one player which compares to a EUR15 above the line from the two leaders, us and Telecom Italia. This is the essence of my comment. It is a market which is showing signs of improvement. But until you have in the markets offers below the line which are so distant from the above one, of course, it's unstable, because you don't know whether it's tuned up or down and you don't know about the credibility of your advertising. So it is essential that this situation, at some point, gets reduced. I'm happy with the recent performance. The trend is one of the best that we have in Vodafone. And the job that our colleagues have done on cost has been also very good. There is this instability that stays there. So trends are good, usage is good, low pricing, great 4G, data usage is also good and we have a much better performance than, at least in the last quarter, our competitors. But it's still a negative with a big ticking thing which is there. And everything goes back to the question of consolidation, Wind and Hutch. and the whole thing that it's another saga that we have been discussing for many times. In terms of Vodafone Italy, I am positive. We have positive growth in fixed line, positive growth in enterprise. I have to say, also in broadband we have taken a number which is not huge but is better than most other players in the market. And we're ramping up our coverage from 1 million marketable homes to 3 million. If, on top of that, we can find a good agreement with Telecom Italia on this Metroweb saga then return on capital, not necessarily the margins, return on capital could go up pretty quickly. Because Italy, given the nature of the market and there's no cable, subsidies are limited and continue to be limited, can become, again, a very high return on capital market. I don't think the EBITDA margins will go back to where they were, but if we're rational in capital allocation in Italy it could be a good story.
Nick Read:

Could I just do one [indiscernible] which is, don't forget, at quarter 1, quarter 2 last year we did several price increases, so we start lapping on those. The progress on quarter over quarter will be pretty minimal over the next two quarters, before then starting to improve again for all the underlying things that Vittorio said.
James Ratzer:

It's James Ratzer from New Street Research. I had two questions, please. The first one was just regarding your message about increasing commercial activity in the market. It seems like you're giving a signal you want to increase that to start seeing the benefit or allowing customers to see the benefit, of Project Spring. But it seems like your competitors are also hearing that message as well. We've seen Deutsche Telekom increase their own SACs; TI saying they don't want to give up customers. It seems like Bharti and Idea are giving quite bullish revenue growth guidance for this year. How should we, as analysts, be sitting here in a year's time, measure whether that commercial push has been a success? Should we be looking --?
Vittorio Colao:

ARPU.
James Ratzer:

ARPU? So we shouldn't be measuring whether you think it's service revenue market share or contract net adds; we should be looking more at the ARPU metric?
Vittorio Colao:

Yes, you guys have a difficult job because you hear all these stories and they all individually make sense and then you put them together and you say they cannot all be winning and all doing the same thing, right. But the reality is if we manage to really change the perception or the value of data which I think we're, because I hear more from customers, more positive and more - higher willingness to spend for data and we can go into this more expansionary phase, in the end it should ARPU. It should not be price per gig or whatever, it should be ARPU. And then, some people will focus more on subs and other people more on service revenues and other people. But at the end of the day, I prefer --look at the UK, for example. In the UK, we're doing marginally better than even the bigger competitor. I think it's about smart pricing. I think it's about the service that you get. I think it's about content that we're bundling together. That is a positive story. Now, probably, EE will have another positive story. They would tell you, well, I'm not doing exactly the same things but I am doing this. Fine. It's conducive to a better environment. I'm a little bit less optimistic when I hear again sheer customer accounts or things like that, because it's very easy in our business to inflate customer accounts just by buying growth. But I would say ARPU, I would say stability and enrichment of price plans is the right way to go in most markets.
James Ratzer:

Okay, great. Thank you. Now, the second question I had, I don't know how much you can comment on this, but I'll ask nonetheless, just regarding M&A. There is obviously been a lot of speculation in the marketplace around Liberty Global, so I was wondering if you could say whether, a, have you had any discussions with Liberty Global about any kind of potential deal? And if the answer to that is no, are you tempted to pick up the phone to Mike Fries and see if a deal can be done? It seems like most people think there are significant synergies that could be unlocked from such a transaction.
Vittorio Colao:

I don't think I have to look at my scripted answers to tell you that I don't comment on what I have done or what I will do, unless there is something that we need to report about. And if I have not made those comments, it means that there is nothing that I have to report about. In practical terms, we look at assets, we look at countries and if we find things that make sense, whether it's Liberty or Hellas Online or whatever, we look and consider. And if there aren't, we continue with our organic strategy and we continue with our own Spring investment and our own commercial plans. So, that's the only thing I can say.
Mark Wade:

It's Mark Wade from Rogge. Just an extension of that last one, as we look at the UK, obviously, BTEE, next year you're looking to expand. To what extent do you feel under some degree of urgency in terms of your - how you're going to build out your UK plan? Would you like to get a bit of a front step ahead of that, ahead of BTEE? Obviously, we look at Virgin Media. Just away from price, operationally, what is the head start you want to get there? And what and what are the benefits of, say, a transaction with Virgin Media operationally? Or can you achieve it purely through organic?
Vittorio Colao:

Yes, it's a smart way to re-ask the same question. Let me answer instead a different question which you didn't ask which is a question about the UK. First of all, how urgent and how pressed do we feel/do I feel? I'm paid to be paranoid and I'm paid to be - to feel the urgency. So the answer is I do feel the urgency. I'm a bit frustrated of the slow and difficult environment for installing equipment in this country. But my colleagues are working hard and we have improved, as we showed today, the numbers, not as much as Italy, but eventually we will get there. We have pushed and Philipp has pushed a lot, to get a broadened offer which can be marketable this summer and to have a TV offer which is marketable before the end of the year, because I do feel that it is essential to have the whole set of products and services that customers might ask. What I don't feel pressured is, for the time being, to decide, from a pricing perspective, do I want to be completely disruptive; do I want to be moderately disruptive; or do I want to be just another player. That will depend a lot also on what other competitors do, because I'm not the biggest player in the market. So, pressure to deliver, a lot; pressure to disrupt, we will decide. We will decide, depending on - one comment on BTEE which you kind of implied; it's a deal that has to go through with remedies and with mitigations, otherwise, it's better for it not to go through. EE cannot keep the network-sharing agreement with 3. If they keep it, they would have, between 3, O2 and EE, a disproportionate dominant share of the UK mobile traffic. From a regulatory point of view, that should not be allowed and cannot be allowed. So they have to give up on that one, otherwise the deal should not go through. They have to give up some spectrum, because you cannot allow somebody who controls all the fixed lines in the country and the majority of the links to also have 60% of the 4G-ready frequencies. And they have to give a decent fair access to fiber, ideally, with a split of open reach, in practice, probably with strong remedies. So, I don't give it for granted that it will go through easily and without landscape changes. If it goes through, I could even support with the right conditions. It is not that we're going to be completely on the side. Yes, there is a much bigger competitor, but we cannot allow to go through without appropriate measures.
Jerry Dellis:

It's Jerry Dellis from Jefferies. I've got two questions, please. Firstly, around content, given the fortress rebuilding activities of Telefonica and BT and others using exclusive content to differentiate their service propositions, could there ever be a situation in which maybe on a market-by-market basis Vodafone would consider procuring content directly? Or is there enough run-way in your current strategy around using wholesale bundles? And then, secondly, a question on wholesale competitors in the mobile arena. Liberty Global seems to be indicating that European anti-trust remedies offer them interesting access to European mobile. TalkTalk last week was suggesting that they can be highly disruptive using a network of 4G femtocells, backed up by a national roaming agreement. In general, do you think there are conditions now where wholesale competitors in the mobile arena might be capable of being more disruptive in future? Is that realistic? Is that something you're concerned about?
Vittorio Colao:

No, less than in the past, to be honest. The whole story of Wi-Fi, femto, hybrid networks, mixed networks, mashed networks, whatever you call them, it seems to me it's losing traction, rather than getting traction. Because it's very complicated and it doesn't deliver a predictable customer experience and you rely on too many pieces. As I said in my early answer to Akhil, I think even Liberty is going in a bit of a different direction. With all due respect, if you're TalkTalk you have to say that and you have to say I'm going to be disruptive in mobile. But I think that the worst thing for them is if somebody is disruptive on fixed, because then it's 100% of what they do. So, I don't think I am more worried. Having said that, yes, in some countries, in some occasions there will be a player who will get very good conditions. I mentioned before the Drillisch case. I remember - and, again, some of you remember that I said openly that when the German remedies were out I said I don't think it's going to be such a good thing in the long-term because Drillisch could at some point play a more negative role. Now, it has not happened yet, but it could happen. So, we keep our eyes on it, because we have to keep our eyes on it, but I wouldn't say directionally I'm more concerned today than six months ago. I wouldn't.
Vittorio Colao:

Content, can we procure, Paolo, directly content? I would say it's early for us. In some markets, we're starting to think about it. It depends a lot also on the regulators. The Spanish regulator has come with a strange thing, that 50% of the channels should be made available at a reasonable price without saying what is reasonable. So if the regulators want to have open access to content then there's no need to go and push up the prices. If at some point this becomes a - BT itself is buying content and de facto not really giving it to everybody. We have to see whether this becomes a delicate key success factor for winning customers. If it does, we will consider it. But we're still in the building of our base and getting into the big schemes. It's early.
Vittorio Colao:

Anybody with a last question? No? In which case, I thank you. And I hope next time we see you it's not only about revenue growth, but also EBITDA growth.

Vodafone Group Public Limited Company Q4 2014 Earnings Call Transcript

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Vodafone Group Public Limited Company
Q4 2014 Earnings Call Transcript