Half-Yearly Report - Part 1

Vodafone Group Plc 13 November 2007 Vodafone Group Plc Half-Yearly Financial Report PART 1 VODAFONE GROUP PLC Embargo: Not for publication HALF-YEARLY FINANCIAL REPORT FOR before 07:00 hours THE SIX MONTHS ENDED 30 SEPTEMBER 2007 13 November 2007 Key highlights(1): â€¢ Group revenue of Â£17.0 billion, an increase of 9.0%, with organic growth of 4.4% - Europe: 2.0% revenue growth with outgoing usage up 24.0%, messaging revenue up 8.6% and data revenue up 40.8%, all on an organic basis - EMAPA: revenue growth of 39.9%, reflecting acquisitions in India and Turkey. Organic growth of 16.0% - Group data revenue up 48.8% to Â£1.0 billion, with organic growth of 45.1% â€¢ Group adjusted operating profit increased 1.6% to Â£5.2 billion, with organic growth of 6.1% â€¢ Free cash flow from continuing operations of Â£2.7 billion, reflecting 8.1% mobile capital intensity for Europe(2) â€¢ Adjusted basic earnings per share increased by 7.4% to 6.42 pence. Basic earnings per share of 6.22 pence â€¢ Proportionate mobile customer base of 241 million at 30 September â€¢ Results reflect rigorous execution against the Group's five strategic objectives Increasing returns to shareholders: â€¢ Interim dividend per share increased by 6.0% to 2.49 pence, giving a payout of over Â£1.3 billion Improved outlook: â€¢ Increased outlook for revenue, adjusted operating profit and free cash flow for the 2008 financial year (1) See page 4 for Group financial and operational highlights, page 35 for definition of terms and page 37 for use of non-GAAP financial information. See page 5 for the Outlook for the 2008 financial year (2) Includes common functions Arun Sarin, Chief Executive, commented: 'These results reflect our continuing focus on the execution of our strategy. In Europe, we have performed well in competitive markets by driving strong growth in voice usage and data revenue, whilst improving cost efficiency. In EMAPA, we are capturing the revenue growth opportunities within emerging markets and benefiting from continuing momentum at Verizon Wireless. The increased interim dividend reflects the Board's confidence in how the business is progressing.' Chief Executive's Statement Rigorous execution against our strategic objectives has been key to our performance in the first half of the year. We have improved our outlook expectations for the full year and the Board has increased the interim dividend by 6.0% to 2.49 pence per share, enhancing returns to our shareholders. Group revenue increased by 9.0% to Â£17.0 billion, or 4.4% on an organic basis. In Europe, where competitive and regulatory pressures remain significant, organic revenue growth was 2.0%. Good revenue growth in Spain and the UK was offset by declines in Germany and Italy, where specific competitive and regulatory events have detracted from an otherwise solid business performance. EMAPA delivered another period of continued growth. Revenue grew by 39.9%, or 16.0% on an organic basis, with strong performances across the region. Group adjusted operating profit increased by 1.6% to Â£5.2 billion, or 6.1% on an organic basis, including an increased contribution from Verizon Wireless which grew by 26.0% on a constant currency basis. Adjusted earnings per share increased by 7.4% to 6.42 pence due to the year on year benefit from the share consolidation in July last year. Our customer franchise increased by 35 million in the period to 241 million proportionate mobile customers, including 20 million net additions. Capital expenditure in the first half was Â£2.0 billion, including Â£0.4 billion in India since its acquisition in May. Free cash flow generation remains strong at Â£2.7 billion, after Â£0.2 billion payments in respect of long standing tax issues. Revenue stimulation and cost reduction in Europe In Europe, our focus is to drive additional usage and revenue from core voice and messaging services and to reduce our cost base. Central to stimulating revenue have been our initiatives to drive mobile usage through offering innovative tariffs, larger minute bundles and targeted promotions. There has also been a specific focus on migrating prepaid customers to contract, thereby improving customer lifetime value. Overall growth in outgoing voice usage remained strong at 24.0% for the first half, but continued pricing pressure resulted in stable outgoing voice revenue. Notwithstanding our efforts in revenue stimulation, elasticity remains below one. In the business segment, which represents approximately 28% of European service revenue and delivered 5.9% growth in the first half, we are leveraging our market leading position. Earlier this year, we established Vodafone Global Enterprise which is responsible for ensuring that we deliver enhanced service and, our total communications offering to our largest multinational customers. 16 million customers now enjoy lower roaming pricing through Vodafone Passport. All of our European customers are now benefiting from our commitment to reduce roaming prices and the recently introduced roaming regulation. Messaging revenue remains robust with 8.6% organic growth, including strong performances in Italy and the UK, driven primarily by targeted promotions and tariffs. Cost reduction remains central to our Group and a number of core cost reduction programmes are now well established. They are delivering savings across the Group and have helped to mitigate pressure on EBITDA margins and reduce our European mobile and common functions capital expenditure to revenue ratio to 8.1% in the first half, below our full year target which remains at 10%. Data centre consolidation and network supply chain management centralisation are delivering savings earlier than originally expected. Innovate and deliver on our customers' total communications needs Our focus is on four key areas which together are expected to represent around 20% of Group revenue by the 2010 financial year. In the first half, these areas contributed about 12% of revenue, up from around 10% in the prior year. Data revenue increased by 45.1% on an organic basis, principally enabled by the rapid growth in 3G devices, which nearly doubled year on year to over 21 million devices. We have also refreshed our consumer mobile internet offering in eight markets, supported by partnerships with leading internet players, and are continuing to develop products and services to integrate the mobile and PC environments. Following completion of the acquisition of Tele2's fixed broadband businesses in Italy and Spain we will have established our preferred route for delivering fixed broadband services in each of our major European markets through a selective approach of wholesale agreements and owned infrastructure. Including Tele2, fixed broadband services will be provided to 3.1 million customers in 13 markets. Revenue from fixed line services increased by 9.9% on an organic basis, primarily due to 9.6% constant currency growth in Arcor. We continue to drive substitution of fixed line usage for mobile through fixed location pricing plans offering customers fixed prices when they call from within or around their home or office. We now have 3.7 million Vodafone At Home customers and 2.6 million Vodafone Office customers. We believe mobile advertising is a significant future opportunity for the mobile industry. We have commercial agreements for mobile advertising in eight markets and are trialling numerous forms of banner and content based advertising. Vodafone is in a leading position to benefit from future trends in this market. Deliver strong growth in emerging markets Our focus is to build on our track record of creating value in emerging markets. We have delivered further good performances in our existing operations with revenue growth of 33.1% in Egypt, 24.0% in Romania and 19.6% in Vodacom on a constant currency basis. Turkey continues to perform well with year on year revenue growth of around 28% on the same basis. Our Indian business is delivering very strong growth. Average net customer additions are running at 1.6 million per month with a customer base of over 35 million at the end of September. Year on year revenue growth was around 53% on a constant currency basis. In September, we successfully rebranded the business to Vodafone, an important integration milestone, ahead of plan. As well as driving customer growth, we are differentiating Vodafone in emerging markets through a number of initiatives. Our ultra low cost handset, which retails for as little as $25, enables us to address a wider population in developing economies. In October, our first month of sales, we sold 400,000 units in India. M-PESA, our innovative money transfer solution was launched in February 2007 and is already benefiting over one million people in Kenya. Efficiency is also vital to success in emerging markets, where low market prices require the lowest possible costs. Actively manage our portfolio to maximise returns We completed the acquisition of Vodafone Essar in India in May 2007 for a cash consideration of Â£5.5 billion. In July, we received Â£0.7 billion from the sale of a 4.99% stake in Bharti Airtel and have agreed the sale of a further 0.61% by November 2008. The acquisitions of Tele2 Italy and Tele2 Spain for Â£0.5 billion will strengthen our total communications offerings in those markets. Align capital structure and shareholder returns policy to strategy We continue to target a low single A rating, consistent with our policy. The Board remains committed to its policy of distributing 60% of adjusted earnings per share by way of dividend. However, as a result of the earnings dilution arising from the India acquisition, the payout ratio is expected to rise above 60% in the near term to better reflect the underlying trends of the business. In growing dividends at 6.0%, ahead of its guidance for modest growth issued in May, the Board has taken into account the Group's current financial performance and its confidence in the prospects for the business. Prospects for the remainder of the year Notwithstanding 40.8% organic growth in data revenue and our success in stimulating voice usage, we expect market conditions and the pricing environment to remain competitive in Europe. Growth prospects for the EMAPA region remain strong as we actively pursue customer growth in markets where penetration is still increasing. Our success in the first half and continued rigorous execution of our strategy has allowed us to improve our outlook for the current financial year. Group revenue is now expected to be in the increased range of Â£34.5 billion to Â£35.1 billion, primarily due to improved operational performance. Adjusted operating profit is also expected to be higher at Â£9.5 billion to Â£9.9 billion, reflecting better revenue generation. Capital expenditure on fixed assets is still expected to be in the range of Â£4.7 billion to Â£5.1 billion, including in excess of Â£1.0 billion in India. Free cash flow is now expected to be Â£4.4 billion to Â£4.9 billion, better than previously expected due to better business performance and lower payments this year related to long standing tax issues. Summary We are delivering tangible results from our strategy which positions us well to deliver total communications to our customers and to generate attractive returns for our shareholders. Arun Sarin GROUP FINANCIAL AND OPERATING HIGHLIGHTS 2007 2006 Change % -------------------- Continuing operations(1)(2)(3) Page Â£m Â£m Reported Organic ------------------------------------------------------------------------------------- Financial information Revenue 21 16,994 15,594 9.0 4.4 Operating profit/(loss) 21 5,208 (2,952) Profit/(loss) before taxation 21 4,560 (3,330) Profit/(loss) for the period 21 3,327 (4,548) Basic earnings/(loss) per share (pence) 21 6.22p (8.02)p Capitalised fixed asset additions 1,982 1,824 8.7 Net cash flow from operating activities 17 4,860 4,840 0.4 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- Performance reporting(1)(2)(3)(4) Group EBITDA 6 6,565 6,242 5.2 2.4 Adjusted operating profit 6,40 5,223 5,141 1.6 6.1 Adjusted profit before tax 8,40 4,701 4,724 (0.5) Adjusted effective tax rate 8 30.1% 29.2% Adjusted profit for the period attributable to equity shareholders 8,40 3,397 3,441 (1.3) Adjusted basic earnings per share (pence)40 6.42p 5.98p 7.4 Free cash flow 17 2,661 2,955 (9.9) Net debt 17 23,253 20,229 14.9 ------------------------------------------------------------------------------------- 2007 2006 Change % -------------------- Continuing operations(1)(2)(3) Page Million Million Reported Organic ------------------------------------------------------------------------------------- Operational Data revenue (Â£) 6 967 650 48.8 45.1 3G registered devices 43 21.4 11.1 Mobile voice usage (minutes) 44 198,252 115,143 Proportionate mobile customer net additions 42 20.5 11.5 Proportionate mobile customers 42 241.5 191.6 ------------------------------------------------------------------------------------- This half-yearly financial report contains certain information on the Group's results and cash flows that have been derived from amounts calculated in accordance with IFRS but are not themselves IFRS measures. They should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be read in conjunction with the equivalent IFRS measure. Further disclosures are provided under 'Use of non-GAAP financial information' on page 37. Notes: (1) See page 35 for definition of terms. (2) The results for the six months ended 30 September 2006 exclude the results of the discontinued operations in Japan and include the results of the Group's associated undertaking in Belgium and Switzerland until the announcement of their respective disposal in August 2006 and December 2006. (3) Amounts presented as at 30 September or for the six months then ended. (4) Where applicable, these measures are stated excluding non-operating income of associates, impairment losses and other income and expense, changes in the fair value of equity put rights and similar arrangements (see note 2 in investing income and financial costs on page 7)and certain foreign exchange differences. See page 37 for use of non-GAAP financial information. OUTLOOK FOR THE 2008 FINANCIAL YEAR Please see page 35 for definition of terms, page 36 for forward-looking statements and page 37 for use of non-GAAP financial information. ----------------------------------------------------------------------------------------- Original Foreign Updated outlook(1) exchange(2) Acquisitions(3) Upgrade outlook Â£ billion Â£ billion Â£ billion Â£ billion Â£ billion ----------------------------------------------------------------------------------------- Revenue 33.3 to 34.1 0.3 0.2 0.6 34.5 to 35.1 Adjusted operating profit 9.3 to 9.8 - (0.1) 0.2 9.5 to 9.9 Capitalised fixed asset additions 4.7 to 5.1 - - - 4.7 to 5.1 Free cash flow 4.0 to 4.5 0.1 - 0.3 4.4 to 4.9 ----------------------------------------------------------------------------------------- Notes: (1) As originally stated on 29 May 2007. (2) The Group's outlook update reflects current expectations for average foreign exchange rates for the 2008 financial year of approximately Euro 1.45:Â£1 (originally 1.47) and US$2.04:Â£1 (originally 1.98). A substantial majority of the Group's revenue, adjusted operating profit, capitalised fixed asset additions and free cash flow is denominated in currencies other than sterling, the Group's reporting currency. (3) Assumes the financial results of Tele2 Italy and Tele2 Spain will be included with effect from 1 December 2007. Operating conditions are expected to continue to be competitive in Europe with ongoing pricing and regulatory pressures but continued positive trends in data revenue and voice usage. Increasing market penetration continues to result in overall strong growth for the EMAPA region. Group revenue is now expected to be in the range of Â£34.5 billion to Â£35.1 billion, higher than previously anticipated primarily due to improvements in operational performance but also due to net beneficial movements in foreign exchange rates and revenue for Tele2 Italy and Tele2 Spain from the expected date of acquisition. Adjusted operating profit is now expected to be in the range of Â£9.5 billion to Â£9.9 billion, which is greater than previous expectations, driven substantially by better revenue generation. Whilst Group EBITDA margin is still expected to be lower year on year, the Group continues to expect mobile operating expenses to be broadly stable for the total of the Europe region and common functions when compared with the 2006 financial year on an organic basis, excluding the potential impact from developing and delivering new services and from any business restructuring costs. Total depreciation and amortisation charges are now anticipated to be slightly higher at around Â£5.9 billion to Â£6.0 billion, including the impact from the Tele2 acquisitions. The outlook range for capitalised fixed asset additions remains unchanged at Â£4.7 billion to Â£5.1 billion and continues to include in excess of Â£1.0 billion in India. Capitalised mobile fixed asset additions for the total of the Europe region and common functions are still expected to be 10% of mobile revenue for the year. Free cash flow is expected to be in the range of Â£4.4 billion to Â£4.9 billion, higher than originally expected principally due to improvements in operational performance and lower anticipated tax payments and associated interest this year in respect of the potential settlement of a number of long standing tax issues, which are now expected to be Â£0.3 billion. The outlook for free cash flow is stated including the impact of known spectrum or licence payments only. The Group still expects that further significant cash payments for tax and associated interest may be made in respect of long standing tax issues. Whilst the timing of such payments remains uncertain, the Group now expects resolution of the most significant issues, principally the application of the UK Controlled Foreign Company legislation to the Group, to be later than previously anticipated. The adjusted effective tax rate percentage is expected to be similar to the 2007 financial year rate of 30.5%, which is slightly lower than previously anticipated. The Group's longer term expectation for the adjusted tax rate remains in the low 30s. CONTENTS ------------------------------------------------------------------------------------ Page Financial results 6 Liquidity and capital resources 17 Significant transactions 19 Risk factors 19 Subsequent events 20 Responsibility statement 20 Condensed consolidated financial statements 21 Other information 35 Use of non-GAAP financial information 37 Additional investor information and key performance indicators 38 ------------------------------------------------------------------------------------ FINANCIAL RESULTS GROUP RESULTS The following results are presented for continuing operations. Europe includes the results of the Group's operations in Western Europe, while EMAPA includes the results of the Group's operations in Eastern Europe, the Middle East, Africa, Asia and the Pacific area and the Group's associate in the US, Verizon Wireless. During the six months ended 30 September 2007, the Group changed its organisation structure and the Group's associated undertaking in France, SFR, is now managed within the Europe region and reported within Other Europe. The results for all periods are presented in accordance with the new structure. ------------------------------------------------------------------------------------------------ Common Elim- Europe EMAPA Functions(2) inations 2007 2006 % change Â£m Â£m Â£m Â£m Â£m Â£m Â£ Organic Voice revenue(1) 8,704 3,499 (43) 12,160 11,317 Messaging revenue 1,575 377 (4) 1,948 1,786 Data revenue 843 127 (3) 967 650 Fixed line revenue(1) 780 22 - 802 770 Other service revenue 11 - (1) 10 - ------------------------------------------------------- Total service revenue 11,913 4,025 (51) 15,887 14,523 9.4 4.6 Acquisition revenue 463 211 - 674 642 Retention revenue 165 14 - 179 182 Other revenue 128 51 80 (5) 254 247 ------------------------------------------------------- Total revenue 12,669 4,301 80 (56) 16,994 15,594 9.0 4.4 Interconnect costs (1,958) (650) 51 (2,557) (2,354) Other direct costs (975) (610) 58 - (1,527) (1,247) Acquisition costs (1,314) (443) - (1,757) (1,556) Retention costs (824) (120) - (944) (854) Operating expenses (2,764) (1,050) 165 5 (3,644) (3,341) ------------------------------------------------------- EBITDA 4,834 1,428 303 - 6,565 6,242 5.2 2.4 Acquired intangibles amortisation (15) (312) - (327) (197) Purchased licence amortisation (413) (36) - (449) (467) Depreciation and other amortisation (1,398) (517) (94) - (2,009) (1,844) Share of result in associates 261 1,181 1 - 1,443 1,407 ------------------------------------------------------- Adjusted operating profit 3,269 1,744 210 - 5,223 5,141 1.6 6.1 Adjustments for: Impairment losses - - - - - (8,100) Other - (15) - - (15) 1 Non-operating income of associates - - - - - 6 ------------------------------------------------------- Operating profit/(loss) 3,269 1,729 210 - 5,208 (2,952) ======================================================= ------------------------------------------------------------------------------------------------ Notes: (1) Revenue relating to fixed line activities provided by mobile operators, previously classified within voice revenue, is now presented as fixed line revenue, together with revenue from fixed line operators and DSL. All prior periods have been adjusted accordingly. (2) Common functions represents the results of Partner Markets and the net result of unallocated central Group costs and recharges to the Group's operations, including royalty fees for use of the Vodafone brand. Revenue Revenue increased by 9.0% to Â£16,994 million for the six months ended 30 September 2007, comprising organic growth of 4.4% and the impact of acquisitions and disposals of 5.4%, primarily from acquisitions of subsidiaries in India in May 2007 and Turkey in May 2006, partially offset by the impact of unfavourable movements in exchange rates of 0.8%. Both the Europe and EMAPA regions increased total revenue on an organic basis, achieving growth of 2.0% and 16.0%, respectively. On a reported basis, Europe achieved growth of 1.5%, while EMAPA achieved growth of 39.9%, of which 26.5% was contributed by the impact of acquisitions and disposals, including the acquisition of subsidiaries in India and Turkey. The organic growth in revenue was driven by a continued increase in the customer base and successful usage stimulation initiatives, despite persisting price pressures. The organic growth in data revenue of 45.1% was particularly strong and can be attributed in part to increasing penetration of Vodafone Mobile Connect 3G/GPRS data cards and handheld business devices. Operating result Operating profit increased to Â£5,208 million from a loss of Â£2,952 million in the prior year, mainly as a result of impairment charges not being incurred in the current year. Adjusted operating profit increased by 1.6% to Â£5,223 million, or by 6.1% on an organic basis. Foreign exchange rate movements, particularly in relation to Verizon Wireless and Vodacom, the Group's 50% owned joint venture with principal operations in South Africa, and the net impact of acquisitions and disposals reduced reported growth by 2.6% and 1.9% respectively, with the latter primarily being due to the increase in amortisation of acquired intangible assets. Adjusted operating profit is stated after Â£327 million of acquired intangible asset amortisation, an increase of Â£130 million from the same period last year. The EMAPA region's strong growth was partly offset by a slight decline in profitability in the Europe region resulting from the continuing challenges of highly penetrated markets, termination rate cuts and a high level of competition. The EBITDA margin in Europe was 38.2% compared to 39.5% in the same period last year, reflecting higher costs, in particular increased interconnect costs, other direct costs and acquisition costs resulting from the competitive environment in the region. In the EMAPA region, the EBITDA margin declined to 33.2% from 35.8% for the same period last year, in part due to higher growth in the region through investment in customer base growth, and in part due to the inclusion for the whole of the current period of Turkey, which has a lower EBITDA margin than the region's average. In addition, the EBITDA margin in Turkey decreased due to investment in the rebranding of the business to Vodafone, improving network quality and growing the customer base. The Group's share of results from associates grew by 2.6%, or by 18.2% on an organic basis, with the impact of the disposals of the Group's interests in Belgacom Mobile SA and Swisscom Mobile AG during the prior financial year, and unfavourable foreign exchange movements, reducing reported growth by 9.0% and 6.6% respectively. The organic growth was driven by strong growth in Verizon Wireless. Investment income and financing costs Six months to Six months to 30 September 30 September 2007 2006 Â£m Â£m Investment income 382 425 Financing costs (1,280) (813) --------- --------- (898) (388) ========= ========= Analysed as: Net financing costs before dividends from investments (394) (272) Potential interest charges arising on settlement of outstanding tax issues (200) (202) Dividends from investments 72 57 --------- --------- (522) (417) Foreign exchange(1) (90) 8 Changes in fair value of equity put rights and similar arrangements(2) (286) 21 --------- --------- (898) (388) ========= ========= Notes: (1) Comprises foreign exchange differences reflected in the income statement in relation to certain intercompany balances, and the foreign exchange differences on financial instruments received as consideration in the disposal of Vodafone Japan to SoftBank, which completed in April 2006. (2) Includes a charge of Â£333 million representing the initial fair value of the put options granted over the Essar group's interest in Vodafone Essar, which has been recorded as an expense. Further details of these options are provided on page 19. Net financing costs before dividends from investments increased by 44.9% to Â£394 million following an increase in average net debt of 28.7%, a change in the currency mix and higher interest rates. At 30 September 2007, the provision for potential interest charges arising on settlement of outstanding tax issues was Â£1,409 million (30 September 2006: Â£1,047 million). Taxation Six months to Six months to 30 September 30 September 2007 2006 Â£m Â£m Income tax expense 1,233 1,218 Recognition of pre-acquisition deferred tax asset 15 - Tax on adjustments to derive adjusted profit before tax 19 2 --------- --------- Adjusted income tax expense 1,267 1,220 Share of associated undertakings' tax 222 240 --------- --------- Adjusted income tax expense for purposes of calculating adjusted tax rate 1,489 1,460 ========= ========= Profit /(loss) before tax 4,560 (3,330) Adjustments to derive adjusted profit before tax (1) 141 8,054 --------- --------- Adjusted profit before tax 4,701 4,724 Add: Share of associated undertakings' tax and minority interest 250 271 --------- --------- Adjusted profit before tax for the purpose of calculating adjusted effective tax rate 4,951 4,995 ========= ========= Adjusted effective tax rate 30.1% 29.2% ========= ========= Note: (1) See earnings/(loss) per share below. The adjusted effective tax rate for the six months ended 30 September 2007 was 30.1% compared to 29.2% for the same period last year. The effective rate, excluding impairment losses and other adjustments, for the year ending 31 March 2008 is expected to be similar to the effective rate for the year ended 31 March 2007 of 30.5%. Earnings/(loss) per share Adjusted earnings per share increased by 7.4% from 5.98 pence to 6.42 pence for the six months ended 30 September 2007, with the increase being primarily due to the lower weighted average number of shares following the share consolidation which occurred in July 2006 and which therefore, will not benefit the second half of the financial year. Basic earnings per share from continuing operations was 6.22 pence compared to a basic loss per share from continuing operations of 8.02 pence for the same period last year. Six months to Six months to 30 September 30 September 2007 2006 Â£m Â£m Profit/(loss) from continuing operations attributable to equity shareholders 3,290 (4,611) --------- --------- Adjustments: Impairment losses - 8,100 Other income and expense 15 (1) Share of associated undertakings' non-operating income - (6) Non-operating income and expense(1) (250) (10) Foreign exchange(2) 90 (8) Changes in fair value of equity put rights and similar arrangements(3) 286 (21) --------- --------- 141 8,054 Tax on the above items (19) (2) Recognition of pre-acquisition deferred tax asset (15) - --------- --------- Adjusted profit from continuing operations attributable to equity shareholders 3,397 3,441 ========= ========= Weighted average number of shares outstanding - basic 52,935 57,515 Weighted average number of shares outstanding - diluted (4) 53,116 57,515 Notes: (1) The Â£250 million adjustment for the six months ended 30 September 2007 represents the profit on disposal of the Group's 5.60% stake in Bharti Airtel. (2) See note 1 in investment income and financing costs on page 7. (3) See note 2 in investment income and financing costs on page 7. (4) In the six months ended 30 September 2006, 140 million shares have been excluded from the calculation of diluted loss per share as they are not dilutive. EUROPE RESULTS ------------------------------------------------------------------------------------------------ Germany Italy Spain UK Arcor Other Eliminations Europe % change Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£ Organic Six months to 30 Sept 2007 Voice revenue(1) 1,888 1,570 1,867 1,855 - 1,690 (166) 8,704 Messaging revenue 354 324 205 444 - 265 (17) 1,575 Data revenue 265 119 170 184 - 133 (28) 843 Fixed line revenue (1) 7 10 9 12 758 16 (32) 780 Other service revenue 1 2 - 8 - - - 11 -------------------------------------------------------------- Total service revenue 2,515 2,025 2,251 2,503 758 2,104 (243) 11,913 1.7 2.3 Acquisition revenue 83 58 120 127 10 67 (2) 463 Retention revenue 21 12 64 21 - 47 - 165 Other revenue 31 2 4 66 - 25 - 128 -------------------------------------------------------------- Total revenue 2,650 2,097 2,439 2,717 768 2,243 (245) 12,669 1.5 2.0 Interconnect costs (319) (343) (350) (579) (182) (428) 243 (1,958) Other direct costs (145) (99) (186) (243) (164) (138) - (975) Acquisition costs (290) (134) (278) (368) (78) (168) 2 (1,314) Retention costs (202) (52) (238) (177) - (155) - (824) Operating expenses (544) (433) (438) (616) (206) (527) - (2,764) -------------------------------------------------------------- EBITDA 1,150 1,036 949 734 138 827 - 4,834 (2.0) (1.5) Acquired intangibles amortisation - - - (11) - (4) - (15) Purchased licence amortisation (170) (39) (3) (166) - (35) - (413) Depreciation and other amortisation (336) (221) (231) (314) (46) (250) - (1,398) Share of result in associates - - - - - 261 - 261 -------------------------------------------------------------- Adjusted operating profit 644 776 715 243 92 799 - 3,269 (2.7) (2.3) ============================================================== EBITDA margin 43.4% 49.4% 38.9% 27.0% 18.0% 36.9% 38.2% Six months to 30 Sept 2006 Voice revenue(1) 2,106 1,721 1,729 1,838 - 1,731 (205) 8,920 Messaging revenue 386 275 190 365 - 256 (14) 1,458 Data revenue 190 89 122 134 - 91 (23) 603 Fixed line revenue (1) 8 11 9 8 697 12 (14) 731 -------------------------------------------------------------- Total service revenue 2,690 2,096 2,050 2,345 697 2,090 (256) 11,712 Acquisition revenue 71 57 153 120 9 56 - 466 Retention revenue 17 20 62 29 - 46 - 174 Other revenue 49 1 3 55 - 24 - 132 -------------------------------------------------------------- Total revenue 2,827 2,174 2,268 2,549 706 2,216 (256) 12,484 Interconnect costs (363) (326) (349) (489) (172) (437) 256 (1,880) Other direct costs (167) (111) (174) (209) (119) (119) - (899) Acquisition costs (274) (114) (323) (292) (85) (155) - (1,243) Retention costs (182) (62) (183) (186) - (150) - (763) Operating expenses (578) (433) (426) (588) (204) (536) - (2,765) -------------------------------------------------------------- EBITDA 1,263 1,128 813 785 126 819 - 4,934 Acquired intangibles amortisation - - - (4) - (4) - (8) Purchased licence amortisation (172) (37) (34) (166) - (34) - (443) Depreciation and other amortisation (367) (252) (194) (297) (43) (255) - (1,408) Share of result in associates - - - - - 286 - 286 -------------------------------------------------------------- Adjusted operating profit 724 839 585 318 83 812 - 3,361 ============================================================== EBITDA margin 44.7% 51.9% 35.8% 30.8% 17.8% 37.0% 39.5% % % % % % % Change at constant exchange rates Voice revenue(1) (9.8) (8.1) 8.7 0.9 - (1.8) Messaging revenue (7.7) 18.4 9.0 21.6 - 4.4 Data revenue 40.1 35.7 41.2 37.3 - 49.2 Fixed line revenue (1) (2.6) (5.5) (2.2) 50.0 9.6 34.5 ---------------------------------------- Total service revenue (5.9) (2.7) 10.6 6.7 9.6 1.4 Acquisition revenue 18.3 3.3 (21.4) 5.8 10.0 24.4 Retention revenue 23.5 (42.8) 4.6 (27.6) - 1.8 Other revenue (36.6) 171.4 25.8 20.0 - 4.9 ---------------------------------------- Total revenue (5.7) (2.9) 8.3 6.6 9.6 2.0 Interconnect costs (11.5) 5.7 1.0 18.4 5.8 (1.0) Other direct costs (12.8) (10.1) 8.3 16.3 37.0 16.6 Acquisition costs 6.5 18.5 (13.1) 26.0 (5.6) 9.5 Retention costs 11.6 (15.4) 30.6 (4.8) - 4.0 Operating expenses (5.3) 0.9 3.6 4.8 1.8 (1.3) ---------------------------------------- EBITDA (8.4) (7.5) 17.5 (6.5) 11.0 1.8 Acquired intangibles amortisation - - - 175.0 - 100.0 Purchased licence amortisation - 5.4 (91.2) - - 6.1 Depreciation and other amortisation (8.2) (11.6) 19.7 5.7 9.5 (1.6) Share of result in associates - - - - - (8.4) ---------------------------------------- Adjusted operating profit (10.5) (6.9) 23.0 (23.6) 12.1 (1.2) ======================================== EBITDA margin movement (1.3) (2.5) 3.0 (3.8) 0.3 (0.1) ------------------------------------------------------------------------------------------------ Note: (1) Revenue relating to fixed line activities provided by mobile operators, previously classified within voice revenue, is now presented as fixed line revenue, together with revenue from fixed line operators and DSL. All prior periods have been adjusted accordingly. ------------------------------------------------------------------------------------ 30 September Germany Italy Spain UK Other Europe ------------------------------------------------------------------------------------ Mobile telecommunications KPIs Closing customers ('000) - 2007 32,541 22,407 15,473 17,959 17,684 106,064 - 2006 29,622 19,337 14,024 16,287 16,267 95,537 Closing 3G devices ('000) - 2007 4,745 4,700 4,328 3,095 2,873 19,741 - 2006 2,724 2,830 1,739 1,348 1,726 10,367 Voice usage (millions of - 2007 20,160 17,983 17,416 18,075 15,385 89,019 minutes) - 2006 15,593 15,737 14,511 14,786 14,120 74,747 ------------------------------------------------------------------------------------ See page 35 for definition of terms Revenue Revenue growth of 1.5% in the six months ended 30 September 2007 was achieved despite a 0.5% impact from adverse exchange rate movements. Service revenue growth was 1.7% in the six months ended 30 September 2007, with organic growth more than offsetting the adverse exchange rate movements. This growth was achieved predominantly by strong performance in data revenue, following improved service offerings and a significant increase in the number of 3G devices, and also from growth in the total registered mobile customer base which increased by 11.0% and reached 106.1 million at 30 September 2007. The positive impact of these factors on service revenue growth more than offset the negative effects of termination rate cuts, the cancellation of top up fees in Italy resulting from new regulation and the Group's ongoing reduction of European roaming rates. Voice revenue declined by 2.4%, or by 1.9% on an organic basis, driven by the effect of the termination rate cuts, roaming regulation and pricing reductions, which were mostly offset by total voice usage growth of 19.1%. â€¢ Outgoing voice revenue remained broadly stable, with 0.3% organic growth during the period. Strong growth of 24.0% in outgoing call minutes, driven by the increased customer base and a 12.9% increase in outgoing usage per customer, was broadly matched by a reduction in the effective rate per minute, resulting from the cancellation of top up fees in Italy and price competition. â€¢ Incoming voice revenue continued to decline, with a 4.4% fall on an organic basis, principally due to the impact of termination rate reductions in Germany, despite a 9.2% increase in incoming mobile voice minutes in the region. â€¢ Roaming and international visitor revenue declined 7.4% on an organic basis, as expected, principally from the impact of the Group's initiatives on retail and wholesale roaming. The overall reduction in revenue was mitigated by an increase of 12.4% in the respective volume of voice minutes used during the period. The region recorded 8.0% growth in messaging revenue, or 8.6% on an organic basis compared with the same period last year, principally as a result of strong growth in messaging usage, particularly in Italy and the UK. Data revenue growth remained strong, increasing by 39.8%, or by 40.8% on an organic basis. Data revenue continues to benefit from growth in connectivity services, demonstrated by the increasing penetration of 3G devices, which have nearly doubled since September 2006 to 19.7 million. Handheld business devices increased by 112.6% since September last year and Vodafone Mobile Connect 3G/ GPRS data cards grew by 78.9%. Fixed line revenue increased by 6.7%, or by 7.6% on an organic basis, mainly due to a 9.6% increase in Arcor's service revenue at constant exchange rates. Germany At constant exchange rates, service revenue declined by 5.9%, mainly resulting from a 9.8% fall in voice revenue. This decline was driven by the impact of termination rate reductions, prior year tariff cuts and wholesale roaming rates. Although the prior year tariff changes resulted in a 30.9% fall in the effective outbound rate per minute, the impact of these changes was partially offset by a strong 38.1% increase in outgoing voice minutes. Messaging revenue also fell 7.7% at constant exchange rates, primarily as a result of higher take up of bundled offers on contract and reductions in messaging per user in the prepaid customer base. Partly offsetting these impacts was strong data revenue growth of 40.1% at constant exchange rates which has been achieved through continued growth in business services and the associated increasing penetration of 3G devices. Italy At constant exchange rates, service revenue declined by 2.7%, including an 8.1% decline in voice revenue primarily resulting from the negative impact of the cancellation of top up fees in March 2007 and termination rate cuts. The decrease in voice revenue was partially mitigated by a 14.3% increase in total voice usage, including a 17.8% increase in outgoing voice usage. Growth was driven by successful commercial initiatives which also resulted in a 23.3% increase in closing contract customers, predominantly within the business customer base. Despite the retail price decline, voice roaming revenue grew by 7.7% at constant exchange rates driven by a 15.7% increase in roaming minutes. Continued momentum from successful messaging propositions launched earlier in the calendar year helped achieve messaging growth of 18.4% at constant exchange rates. Strong growth in Vodafone Connect USB Modems, Vodafone Mobile Connect Cards with 3G broadband and an increase in handheld business devices drove data revenue growth of 35.7% at constant exchange rates. Spain Service revenue growth in Spain was 10.6% at constant exchange rates. The rate of service revenue growth slowed during the quarter ended 30 September 2007, compared with the previous quarter, due to a strong summer promotion in the prior year, a more intensified competitive market and a lower growth in the average customer base. An 8.7% increase in voice revenue at constant exchange rates was achieved, predominantly due to a 10.3% increase in the customer base, although this was partially impacted by a termination rate cut in the period. 3G devices grew by 148.9% to 4.3 million devices, helping to drive data revenue growth of 41.2% at constant exchange rates compared with the same period last year. UK Service revenue in the UK increased by 6.7%, benefiting from a 10.3% increase in the customer base, reflecting an increase in contract customer market share, and from a Â£30 million VAT refund. Voice revenue increased by 0.9% with increases in voice usage, partly prompted by the increase in the customer base following the success of the refreshed voice tariffs launched in the previous year, more than offsetting falls in price per minute and reductions in roaming rates. Messaging and data revenue growth have remained strong at 21.6% and 37.3%, respectively. Messaging revenue growth reflects the continued success of propositions launched last year. Similarly, increasing penetration of Vodafone Mobile Connect 3G/GPRS data cards and handheld business devices combined with enhanced connectivity service offerings helped drive strong data revenue growth. Arcor Arcor generated a 9.6% increase in service revenue at constant exchange rates. In a very competitive market, growth was principally driven by a 39.6% increase in DSL customers to 2.3 million. Other Europe Service revenue in Other Europe remained broadly stable compared with the same period last year, after a 0.7% adverse impact from foreign exchange movements. At constant exchange rates, service revenue increased by 6.4% and 5.8% in Portugal and the Netherlands respectively, although these increases were mostly offset by a 6.1% decline in Greece. The decline in Greece arose from the impact of termination rate cuts in January and June of this year and the cessation in April of a national roaming agreement. Adjusted operating profit Adjusted operating profit fell by 2.7%, or by 2.3% on an organic basis, while the EBITDA margin decreased by 1.3%. Growth in interconnect costs, other direct costs and acquisition costs was the largest driver behind this decline. Interconnect costs increased by 4.1% compared with the same period in the prior year, with the increased call volumes in the region partly offset by the benefit obtained from termination rate cuts. The main increases in interconnect costs were recorded in the UK and Italy, partially offset by reductions in Germany. Other direct costs rose by 8.5%, mostly resulting from Arcor and the UK. Within Arcor, an increase in direct access charges resulted from achieving a higher customer base. The increase in other direct costs in the UK was mainly due to investment in content based data services and, in part, to a portion of commissions being recorded in other direct costs to reflect their ongoing nature following changes to the commercial model. Acquisition costs increased by 5.7% compared with the same period last year, primarily reflecting increases in the UK, as well as smaller increases in Germany and Italy, partly offset by lower costs in Spain. Acquisition costs in the UK reflected higher contract customer additions and higher costs per addition in a competitive market. Retention costs increased by 8.0%, predominantly an effect of the increased volume of upgrades in Spain resulting from the recent large customer growth and more proactive churn management. Across the region, costs per upgrade remained similar year on year, except in Italy following increased focus on the retention of high value prepaid customers that began in the summer of the last financial year. Operating expenses were broadly stable as a result of various initiatives implemented to achieve the broadly stable operating expenses target. Specific actions undertaken included restructuring in Germany, Ireland and in common functions, continued migration from leased lines to owned transmission and further renegotiation of contracts relating to various network operating expenses. This has been achieved despite increasing call volumes carried on the Group's networks and customer care from a growing customer base and an increasingly competitive market place. Germany Adjusted operating profit fell by 10.5% at constant exchange rates as a result of the reduction in voice revenue. Costs within Germany also fell overall, with the largest reductions experienced in interconnect costs, which fell by 11.5% at constant exchange rates, as a result of the termination rate cut. Operating expenses fell by 5.3% at constant exchange rates resulting from targeted cost reduction programmes. Increases in acquisition and retention costs of 6.5% and 11.6% at constant exchange rates arose as a result of higher gross additions and upgrades. Acquisition costs per customer fell, while retention costs increased 3.2% on a per customer basis. Depreciation and other amortisation charges fell by 8.2% on a constant currency basis due to the centralisation of the service platform operations that was completed in the last financial year and the ongoing progress on centralisation of data centres. Italy Adjusted operating profit fell by 6.9% at constant exchange rates, driven primarily by the reduction in service revenue. The main movements in the cost base in Italy were in relation to interconnect costs, which increased by 5.7% at constant exchange rates due to the increased number of outgoing minutes, particularly to other mobile networks, and acquisition costs which increased by 18.5% at constant exchange rates reflecting an increase in volumes, mainly higher value contract customers. Operating expenses remained flat compared to the prior year due to cost saving initiatives. Reduced depreciation and other amortisation of 11.6% at constant exchange rates resulted from lower capital expenditure, including the centralisation of data centre operations. Spain Adjusted operating profit increased by 23.0% at constant exchange rates as interconnect costs remained stable, due to the reduction in termination rates and an increase in volume of calls made to other Vodafone customers which do not incur interconnect costs, as well as overall cost control producing a reduction in expenses as a percentage of overall revenue. Retention costs increased by 30.6% at constant exchange rates resulting from an increased volume of upgrades compared to the prior year, which was largely offset by a decrease in acquisition costs of 13.1% at constant exchange rates reflecting lower additions in the current period. UK Although service revenue grew by 6.7%, adjusted operating profit decreased by 23.6% mainly due to investment in new customers driving a 26.0% increase in acquisition costs. The higher customer base and new tariffs generated a 27.6% increase in outgoing mobile minutes which in turn increased interconnect costs by 18.4%. Additionally, other direct costs rose by 16.3% due in part to investment in content based data services and an incentive based commission structure for indirect partners, which has led to improved customer retention. Arcor Adjusted operating profit increased by 12.1% at constant exchange rates, as the 9.6% increase in service revenue outpaced the 9.3% growth in the cost base at constant exchange rates. The increase in the cost base was primarily driven by other direct costs, which increased by 37.0% at constant exchange rates, as a result of higher direct access charges incurred due to the larger customer base, while other components of the cost base remained relatively stable. Other Europe Adjusted operating profit decreased by 1.6%. Portugal and the Netherlands contributed adjusted operating profit growth at constant exchange rates of 15.4% and 39.1% respectively, resulting from strong cost control and a fall in costs as a percentage of service revenue. Growth in these countries was offset by a fall in the share of results in associates, which fell 8.5% at constant exchange rates, and by a decrease in adjusted operating profit at constant exchange rates of 22.3% in Greece, where results were affected by a decline in service revenue, increased retention and marketing costs and a regulatory fine. EMAPA RESULTS ------------------------------------------------------------------------------------------ Middle East Eastern Africa Associates Associates Europe & Asia Pacific US Other EMAPA % change Â£m Â£m Â£m Â£m Â£m Â£m Â£ Organic Six months to 30 Sept 2007 Voice revenue(1) 1,260 1,735 504 3,499 Messaging revenue 156 92 129 377 Data revenue 49 50 28 127 Fixed line revenue(1) 8 4 10 22 ------------------------------------------------------- Total service revenue 1,473 1,881 671 4,025 40.9 15.6 Acquisition revenue 26 124 61 211 Retention revenue 11 - 3 14 Other revenue 14 14 23 51 ------------------------------------------------------- Total revenue 1,524 2,019 758 4,301 39.9 16.0 Interconnect costs (252) (280) (118) (650) Other direct costs (222) (255) (133) (610) Acquisition costs (152) (186) (105) (443) Retention costs (41) (52) (27) (120) Operating expenses (379) (470) (201) (1,050) ------------------------------------------------------- EBITDA 478 776 174 1,428 29.8 13.1 Acquired intangibles amortisation (104) (208) - (312) Purchased licence amortisation (12) (16) (8) (36) Depreciation and other amortisation (191) (223) (103) (517) Share of result in associates - 1 - 1,180 - 1,181 ------------------------------------------------------- Adjusted operating profit 171 330 63 1,180 - 1,744 6.1 20.8 ======================================================= EBITDA margin 31.4% 38.4% 23.0% 33.2% Six months to 30 Sept 2006 Voice revenue(1) 946 1,027 458 2,431 Messaging revenue 147 66 118 331 Data revenue 25 11 20 56 Fixed line revenue(1) 5 34 - 39 ------------------------------------------------------- Total service revenue 1,123 1,138 596 2,857 Acquisition revenue 23 105 48 176 Retention revenue 8 - - 8 Other revenue 8 4 22 34 ------------------------------------------------------- Total revenue 1,162 1,247 666 3,075 Interconnect costs (217) (178) (125) (520) Other direct costs (141) (112) (100) (353) Acquisition costs (91) (144) (78) (313) Retention costs (31) (36) (24) (91) Operating expenses (278) (246) (174) (698) ------------------------------------------------------- EBITDA 404 531 165 1,100 Acquired intangibles amortisation (127) (61) (1) (189) Purchased licence amortisation (8) (9) (7) (24) Depreciation and other amortisation (151) (122) (91) (364) Share of result in associates - - - 1,015 106 1,121 ------------------------------------------------------- Adjusted operating profit 118 339 66 1,015 106 1,644 ======================================================= EBITDA margin 34.8% 42.6% 24.8% 35.8% % % % % % Change at constant exchange rates Voice revenue(1) 31.5 84.4 4.8 Messaging revenue 2.0 51.0 5.3 Data revenue 99.2 395.0 32.5 Fixed line revenue(1) 79.1 (89.5) - ------------------------- Total service revenue 29.2 79.7 7.4 Acquisition revenue 13.7 32.6 21.0 Retention revenue 39.5 - - Other revenue 76.5 353.3 4.4 ------------------------- Total revenue 29.3 76.6 8.8 Interconnect costs 13.2 70.9 (9.7) Other direct costs 48.9 147.1 26.7 Acquisition costs 62.1 45.8 29.8 Retention costs 38.0 57.5 7.5 Operating expenses 33.6 107.9 10.3 ------------------------- EBITDA 19.6 58.4 0.5 Acquired intangibles amortisation (18.8) 271.4 - Purchased licence amortisation 50.0 100.0 - Depreciation and other amortisation 25.7 97.3 7.3 Share of result in associates - - - 26.0 (100.0) ----------------------------------------------- Adjusted operating profit 53.5 5.2 (8.5) 26.0 (100.0) =============================================== EBITDA margin movement (2.6) (4.4) (1.8) ------------------------------------------------------------------------------------------ Note: (1) Revenue relating to fixed line activities provided by mobile operators, previously classified within voice revenue, is now presented as fixed line revenue, together with revenue from fixed line operators and DSL. All prior periods have been adjusted accordingly. -------------------------------------------------------------------------------------- 30 September 2007 30 September 2006 ------------------------------ ---------------------------------- Middle Middle East East Eastern Africa Eastern Africa Europe & Asia Pacific EMAPA Europe & Asia Pacific EMAPA ------------------------------ ---------------------------------- Mobile telecommunications KPIs Closing customers ('000) 31,699 66,810 5,840 104,349 25,879 25,374 5,423 56,676 Closing 3G devices ('000) 517 133 1,022 1,672 224 - 534 758 Voice usage (millions of minutes) 24,230 78,865 6,138 109,233 17,790 17,204 5,402 40,396 -------------------------------------------------------------------------------------- See page 35 for definition of terms Revenue Service revenue increased by 40.9%, or by 15.6% on an organic basis, with the impact of the acquisition of subsidiaries in Turkey and India and the adverse effect of exchange rate movements, particularly in South Africa, accounting for most of the difference. The impact of acquisitions, disposal and exchange rates on EMAPA's service revenue growth are shown below. ----------------------------------------------------------------------------------- Organic Impact of Impact of Reported growth exchange rates acquisitions growth % Percentage and % points disposal(1) Percentage points ----------------------------------------------------------------------------------- Service revenue Eastern Europe 11.0 2.0 18.2 31.2 Middle East, Africa and Asia 25.1 (14.4) 54.6 65.3 Pacific 7.4 5.2 - 12.6 EMAPA 15.6 (2.3) 27.6 40.9 ----------------------------------------------------------------------------------- Note: (1) Impact of acquisitions and disposal includes the impact of the change in consolidation status of Bharti Airtel from a joint venture to an investment in February 2007. The organic service revenue growth was driven predominantly by an organic increase in total voice minutes of 31.8%, a result of a 28.8% organic increase in the average customer base and usage stimulation strategies, which more than offset the impact of pricing pressures in a number of locations. Eastern Europe In Eastern Europe the growth in service revenue benefited from an 18.2 percentage point increase from the prior year acquisition in Turkey, and favourable exchange rate movements of 2.0 percentage points. Organic growth in service revenue was 11.0%, principally driven by an 18.2% organic increase in the average customer base. Romania continued to be the principal driver of organic growth in Eastern Europe, with service revenue growth of 23.2% at constant exchange rates, mainly as a result of a 19.9% increase in the closing customer base, particularly driven by initiatives focused on business and contract customers which contributed to a 33.9% increase in total voice minutes. Turkey continued to perform well with strong customer growth of 29.0% since 30 September 2006, bringing the closing customer base to 15.7 million. This led to total revenue growth of around 28%, assuming the Group owned the business for the whole of the same period last year. Middle East, Africa and Asia Service revenue in Middle East, Africa and Asia grew strongly with a 25.1% increase on an organic basis, mainly due to strong growth in Egypt and from Vodacom. Service revenue growth at constant exchange rates in Egypt was 33.9%, predominantly a result of a 64.0% increase in voice usage which was stimulated by the increased customer base of 12.2 million. Vodacom reported service revenue growth at constant exchange rates of 19.1%, reflecting the Group's share of the 22.6% increase in the closing customer base during the twelve month period to 30 September 2007. The growth in the customer base in the six months ended 30 September 2007 was impacted by a change in the prepaid customer disconnection policy, which resulted in the disconnection of an additional 1.45 million prepaid customers in September 2007. Vodacom's data revenue growth remained very strong, with rapid growth in mobile broadband connectivity devices. The Group's new business in India reported year on year total revenue growth of around 53%, assuming the Group owned the business for the whole of both periods. Customer net additions between the completion of the acquisition and the end of the period were 8.0 million, bringing the closing customer base to 35.7 million. Pacific The Group's operations in the Pacific segment delivered 12.6% service revenue growth, or 7.4% on an organic basis, with the impact of favourable foreign exchange movements being the difference. The organic growth was achieved through a 13.6% increase in total voice minute volumes, a result of the 7.7% growth in the closing customer base in the region, with improved contract mix and a focus on higher value prepaid customers in Australia, though this was partially offset by the impact of termination rate reductions in both Australia and New Zealand in the period. Adjusted operating profit The impact of acquisitions, disposals and exchange rates on EMAPA's EBITDA and adjusted operating profit is shown below: Organic Impact of Impact of Reported growth exchange rates acquisitions growth % Percentage and disposals(1) % points Percentage points EBITDA Eastern Europe 14.0 (1.3) 5.6 18.3 Middle East, Africa and Asia 17.2 (12.3) 41.2 46.1 Pacific 0.5 5.0 - 5.5 EMAPA 13.1 (4.6) 21.3 29.8 Adjusted operating profit Eastern Europe 16.2 (8.6) 37.3 44.9 Middle East, Africa and Asia 13.3 (7.9) (8.1) (2.7) Pacific (8.5) 4.0 - (4.5) EMAPA 20.8 (7.7) (7.0) 6.1 Note: (1) Impact of acquisitions and disposals includes the impact of the change in consolidation status of Bharti Airtel from a joint venture to an investment in February 2007. Adjusted operating profit increased by 6.1%, or by 20.8% on an organic basis, with the increases in revenue achieved by the region being the main driver. The acquisitions in Turkey and India led to a rise in acquired intangible amortisation which reduced the growth in adjusted operating profit, whilst the continued investment in network infrastructure in the region also resulted in higher depreciation charges. The organic growth in adjusted operating profit was driven by strong performances in Romania, Egypt, Vodacom and the Group's associated undertaking in the US. Eastern Europe Adjusted operating profit increased by 16.2% on an organic basis, principally as a result of the growth in revenue in the region, whilst the main movements in the cost base in the Eastern Europe region included a 7.4% organic increase in interconnect costs, resulting from the 26.9% organic increase in outgoing voice minutes, principally from the increased customer base, and a 7.3% organic increase in operating expenses due to growth in the region's businesses, but fell slightly as a percentage of service revenue on an organic basis. Romania remained the principal contributor to the organic growth in costs with a 36.7% increase in interconnect costs at constant exchange rates, a result of the larger customer base and higher average usage per customer, and an increased level of operating expenses due to an increased number of direct sales and distribution employees in a growing business. However, operating expenses decreased as a percentage of service revenue. Romania also accounted for predominantly all of the increase in the region's rise in organic acquisition and retention costs due to higher volumes of gross additions and upgrades. The main cost drivers in Turkey were acquisition costs and operating expenses. Acquisition costs increased in response to a higher level of gross additions, which resulted from better positioning of both contract and prepaid propositions, with a focus on the contract segment. The increase in operating expenses was mainly due to the expansion of the network and higher marketing expenses, which increased primarily as a result of the increased spending since the rebranding of the business to Vodafone in March 2007. Middle East, Africa and Asia Adjusted operating profit increased by 13.3% on an organic basis, as revenue growth more than offset the increase in costs. The organic growth was mainly driven by Egypt and Vodacom. At constant exchange rates, the key increases in Egypt's cost base were interconnect costs which increased by 47.9%, a result of the 77.4% increase in outgoing voice minutes, a 59.8% increase in other direct costs, principally due to prepaid airtime commissions and a 45.7% increase in operating expenses caused by expansion in network infrastructure, and higher marketing and customer care expenses to serve the larger customer base. Growth in adjusted operating profit in Vodacom was impacted by 12.9 percentage points from adverse exchange rate movements. At constant exchange rates, interconnect costs increased by 17.2% in response to the 34.0% increase in outgoing voice minutes and operating expenses increased by 24.4% as a result of higher publicity spending. The Indian mobile market has continued to grow with penetration reaching 18.2% by the end of September 2007. Vodafone Essar, which adopted the Vodafone brand in September 2007, has continued to perform well with EBITDA slightly ahead of the expectations held at the time of the completion of the acquisition. This has been partially due to the Group's rapid network roll out in this market. Pacific Adjusted operating profit decreased 4.5%, after including the impact of favourable exchange movements of 4.0 percentage points, as the increased revenue generated in the region was offset by an increase in costs. The principal cost drivers behind the decline were an increase in other direct costs of 26.7% at constant exchange rates, primarily due to Australia reporting higher contract commissions and, in New Zealand, due to the inclusion of DSL costs from ihug following its acquisition in October 2006 combined with an increased provision for its share of the Total Telecom Service Obligation costs, a regulator imposed cost. There was a 34.4% increase in acquisition costs at constant exchange rates in Australia, a result of increased investment in higher value customers in both the contract and prepaid segments. Operating expenses in Australia increased due to investment in marketing, sales and customer care, whilst the reported increase in New Zealand was due to adverse foreign exchange movements impacting the translation into sterling, an increase in the share of billing system costs and higher payroll costs resulting from improvements in customer care. Associates --------------------------------------------------------------------------------------------- Verizon Wireless 2007 2006 change ---------------------------- ---------------------------- ----------------- Verizon Verizon Constant Wireless Other(1) Total Wireless Other(1) Total Â£ Currency Â£m Â£m Â£m Â£m Â£m Â£m % % Share of result of associates Operating profit 1,366 - 1,366 1,214 136 1,350 12.5 21.8 Interest (65) - (65) (94) 2 (92) (30.9) (26.5) Tax (92) - (92) (73) (32) (105) 26.0 37.2 Minority interest (29) - (29) (32) - (32) (9.4) (2.7) ----------------------------- ------------------------------ 1,180 - 1,180 1,015 106 1,121 16.3 26.0 ----------------------------- ------------------------------ Verizon Wireless (100% basis) Total revenue (Â£m) 11,042 10,327 EBITDA margin 39.1% 38.7% Closing customers ('000) 63,699 56,747 Average monthly ARPU ($) 54.1 52.6 Blended churn 15.1% 14.2% Messaging and data as a percentage of service revenue 18.4% 12.9% --------------------------------------------------------------------------------------------- Note: (1) Other associates in 2006 include the results of the Group's associated undertakings in Belgium and Switzerland until the announcement of their respective disposal in August 2006 and December 2006. Verizon Wireless, the Group's associated undertaking in the US, produced another period of strong organic customer growth, adding 3.4 million net retail customer additions in a market with penetration reaching an estimated 83.1% at 30 September 2007. Total net customer additions of 3.0 million, after 0.4 million net reseller disconnections, equate to 1.3 million in proportionate terms and brought the Group's share of the closing customer base to 28.7 million. The customer growth was achieved through an increase in new customer additions, particularly in the higher value contract segment, and low customer churn driven by market leading customer loyalty. Service revenue growth was 16.6% at constant exchange rates, driven by the expanding customer base and a 2.9% increase in ARPU. Data revenue continued to increase strongly, predominantly as a result of growth in data card, wireless email and messaging services. Verizon Wireless continued to lay the foundations for future data revenue growth through the expansion of CDMA EV-DO Rev A, an enhanced wireless broadband service, which now covers a population of 210 million. Verizon Wireless improved its EBITDA margin mainly due to operating expenditure efficiencies offsetting a higher level of customer acquisition and retention activity during the period. The Group's share of the tax attributable to Verizon Wireless relates only to the corporate entities held by the Verizon Wireless partnership. The tax attributable to the Group's share of the partnership's pre-tax profit is included within the Group tax charge. Verizon Wireless has entered into an agreement to acquire Rural Cellular Corporation for approximately $2.67 billion in cash and assumed debt. The transaction is expected to be completed by the first half of 2008, subject to the receipt of the required regulatory approvals, and will result in an increase in the customer base of Verizon Wireless of more than 0.7 million customers. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS AND FUNDING During the six months ended 30 September 2007, net cash inflow from operating activities fell by 2.3% to Â£4,860 million and the Group generated Â£2,661 million of free cash flow, as analysed in the following table: Six months to Six months to 30 September 30 September 2007 2006 Â£m Â£m % Net cash inflow from operating activities 4,860 4,975 (2.3) ......................................................................................... - Continuing operations 4,860 4,840 0.4 - Discontinued operations - 135 ......................................................................................... Add: Taxation 1,487 1,217 Purchase of intangible fixed assets (320) (298) Purchase of property, plant and equipment (1,902) (1,892) Disposal of property, plant and equipment 13 11 -------- -------- Operating free cash flow 4,138 4,013 3.1 ......................................................................................... - Continuing operations 4,138 4,021 2.9 - Discontinued operations - (8) ......................................................................................... Taxation (1,487) (1,217) Dividends received from associated undertakings (1) 476 371 Dividends paid to minority shareholders in subsidiary undertakings (66) (34) Dividends received from investments 72 57 Interest received 240 256 Interest paid (712) (499) -------- -------- Free cash flow 2,661 2,947 (9.7) ======== ======== ......................................................................................... - Continuing operations 2,661 2,955 (9.9) - Discontinued operations - (8) ......................................................................................... Note: (1) Six months ended 30 September 2007 includes Â£272 million (2006: Â£240 million) from the Group's interest in SFR and Â£199 million (2006: Â£119 million) from the Group's interest in Verizon Wireless. Free cash flow decreased primarily as a result of lower cash inflow from operating activities and higher payments for interest and taxation, partially offset by higher dividends received from associates. An analysis of net debt is as follows: 30 September 31 March 2007 2007 Â£m Â£m Cash and cash equivalents (as presented in the consolidated cash flow statement) 2,873 7,458 Bank overdrafts 28 23 --------- --------- Cash and cash equivalents (as presented in the consolidated balance sheet) 2,901 7,481 --------- --------- Trade and other receivables(1) 291 304 Trade and other payables(1) (465) (219) Short term borrowings (5,673) (4,817) Long term borrowings(2) (20,307) (17,798) --------- --------- (26,154) (22,530) --------- --------- Net debt as extracted from the consolidated balance sheet (23,253) (15,049) --------- --------- Notes: (1) Represents mark to market adjustments on derivative financial instruments which are included as a component of trade and other receivables and trade and other payables. (2) Includes Â£2,464 million related to put options over minority interests, including those in Vodafone Essar and Arcor, which are required to be reported as a financial liability. The Group targets low single A long term credit ratings, with its current credit ratings being P-2/F2/A-2 short term and Baa1 stable/A- stable/A- stable long term from Moody's, Fitch Ratings and Standard & Poor's respectively. Credit ratings are not a recommendation to purchase, hold or sell securities, inasmuch as ratings do not comment on market price or suitability for a particular investor, and are subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently. The Group's credit ratings enable it to have access to a wide range of debt finance, including commercial paper, bonds and committed bank facilities. In aggregate, the Group has committed facilities of approximately Â£8,821 million, of which Â£5,726 million was undrawn and Â£3,095 million drawn at 30 September 2007. The undrawn facilities include a $5.2 billion Revolving Credit Facility that matures in June 2012 and a $6.1 billion Revolving Credit Facility that matures in June 2009. Both facilities support US and euro commercial paper programmes of up to $15 billion and Â£5 billion respectively. At 30 September 2007, no amounts were drawn under the US commercial paper programme and â‚¬785 million (Â£548 million) was drawn under the euro commercial paper programme. Other undrawn facilities of Â£175 million are specific to the Group's subsidiary in Egypt. The Group has a â‚¬25 billion Euro Medium Term Note ('EMTN') programme and a US shelf programme which are used to meet medium to long term funding requirements. At 31 March 2007, the nominal value of bonds outstanding was Â£17,101 million. In the six months to 30 September 2007, bonds with a nominal value of Â£1,221 million were issued under the EMTN programme. The bonds issued during the six months to 30 September 2007 were as follows: Date bond issued Maturity of Currency Amount US shelf programme or bond million EMTN Programme 6 June 2007 6 June 2014 EUR 1,250 EMTN Programme 6 June 2007 6 June 2022 EUR 500 EMTN Programme At 30 September 2007, the Group had bonds outstanding with a nominal value of Â£17,206 million. On 24 October 2007, $500 million aggregate principal amount of bonds maturing on 27 February 2037 were issued under the US shelf programme. On 8 May 2007, the Group acquired a controlling interest in Vodafone Essar. Operating companies acquired in this transaction are funded by external facilities which are non-recourse to other Group companies. At 30 September 2007, a total of INR62.1 billion (Â£765 million) had been fully drawn from committed bank facilities that mature at various dates up to July 2012. Other companies are funded by fully drawn external bank facilities of INR16.4 billion (Â£202 million) that mature at various dates up to February 2010. TOTAL SHAREHOLDER RETURNS Dividends The Company provides returns to shareholders through dividends. The Company has historically paid dividends semi-annually, with a regular interim dividend in respect of the first six months of the financial year payable in February and a final dividend payable in August. The directors expect that the Company will continue to pay dividends semi-annually. The Board remains committed to its policy of distributing 60% of adjusted earnings per share by way of dividend. However, as a result of the earnings dilution arising from the Vodafone Essar acquisition, the payout ratio is expected to rise above 60% in the near term to better reflect the underlying trends of the business. The directors have announced an interim dividend of 2.49 pence per share, representing a 6.0% increase over last year's interim dividend. In growing dividends at 6.0%, ahead of its guidance for modest growth issued in May, the Board has taken into account the Group's current financial performance and its confidence in the prospects for the business. The ex-dividend date is 21 November 2007 for ordinary shareholders, the record date for the interim dividend is 23 November 2007 and the dividend is payable on 1 February 2008. Other returns The Group has no current plans for further share purchases or other one-off shareholder returns. The Board will periodically review the free cash flow, anticipated cash requirements, dividends, credit profile and gearing of the Group and consider additional shareholder returns. Option agreements and similar arrangements On 8 August 2007 the Group announced that it had decided not to exercise its rights under its agreement with Verizon Communications ('Verizon') to sell to Verizon up to $10 billion of the Group's interest in Verizon Wireless. This was the final such option available to Vodafone. As part of the Vodafone Essar acquisition, the Group acquired less than 50% equity interests in Telecom Investments India Private Limited ('TII') and in Omega Telecom Holdings Private Limited ('Omega'). The Group was granted call options to acquire 100% of the shares in two companies which together indirectly own the remaining shares of TII for, if the market equity of Vodafone Essar at the time of exercise is less than US$25 billion, an aggregate price of US$431 million plus interest or, if the market equity value of Vodafone Essar at the time of exercise is greater than US$25 billion, the fair market value of the shares as agreed between the parties. The Group also has an option to acquire 100% of the shares in a third company which owns the remaining shares in Omega. In conjunction with the receipt of these options, the Group also granted a put option to each of the shareholders of these companies with identical pricing which, if exercised, would require Vodafone to purchase 100% of the equity in the respective company. These options can only be exercised in accordance with Indian law prevailing at the time of exercise. The Group granted put options exercisable between 8 May 2010 and 8 May 2011 to members of the Essar group of companies that, if exercised, would allow the Essar group to sell its 33% shareholding in Vodafone Essar to the Group for US$5 billion or to sell between US$1 billion and US$5 billion worth of Vodafone Essar shares to the Group at an independently appraised fair market value. SIGNIFICANT TRANSACTIONS The Group invested a net Â£4,724 million(1) in acquisition and disposal activities, including the purchase and disposal of investments, in the six months ended 30 September 2007. An analysis of the significant transactions and the changes to the Group's effective interest in the entities is shown below. Â£m Acquisitions(1): Acquisition of 100% of CGP Investments (Holdings) Limited ('CGP'), a company with interests in Hutchison Essar Limited (subsequently renamed Vodafone Essar Limited) (5,428) Disposals(1): Partial disposal of Bharti Airtel Limited (from 9.99% to 5.00%) 654 Other net acquisitions and disposals, including investments(1) 50 -------- (4,724) ======== Note: (1) Amounts are shown net of cash and cash equivalents acquired or disposed. On 8 May 2007, the Group completed the acquisition of 100% of CGP, a company with interests in Vodafone Essar, from Hutchison Telecommunications International Limited for cash consideration of Â£5,479 million, gross of Â£51 million cash and cash equivalents acquired. Following this transaction, the Group has a controlling financial interest in Vodafone Essar. As part of this transaction, the Group also assumed gross debt of Â£1,466 million, including Â£217 million related to written put options over minority interests, and issued a written put to the Essar Group for which the present value of the redemption price was Â£2,154 million. In conjunction with the acquisition of Vodafone Essar, the Group entered into a share sale and purchase agreement with a Bharti group company regarding the Group's 5.60% direct shareholding in Bharti Airtel. On 9 May 2007, a Bharti group company irrevocably agreed to purchase this shareholding. The Group received Â£654 million in cash consideration for 4.99% of such shareholding, with the Group's remaining 0.61% direct shareholding to be transferred by November 2008. RISK FACTORS There are a number of risk factors and uncertainties that could have a significant effect on the Group's financial performance including: â€¢ the level of competition in the markets in which it and its interests operate which may affect the Group's revenue and market share; â€¢ decisions and changes in the Group's regulatory environment; â€¢ the non achievement of expected benefits from cost reduction initiatives and from business acquisitions; â€¢ expected benefits from investment in networks, licences and new technology may not be realised; â€¢ delays in the development of handsets and network compatibility and components may hinder the deployment of new technologies; â€¢ geographic expansion may increase the Group's exposure to unpredictable economic, political and legal risks; â€¢ the Group's strategic objectives may be impeded by the fact that it does not have a controlling interest in some of its ventures; â€¢ the Group's business may be adversely affected by the non-supply of equipment and support services by a major supplier; â€¢ the Group may experience a decline in revenue or profitability notwithstanding its efforts to increase revenue from the introduction of new services; and â€¢ the Group's business and its ability to retain customers and attract new customers may be impaired by actual or perceived health risks associated with the transmission of radio waves from mobile telephones, transmitters and associated equipment. In addition to the above, the Group is exposed to financial risks arising from external factors including the movements in foreign exchange rates, interest rates and other factors such as long term economic growth rates, all of which may impact the Group's financial performance. Non financial risks that could have a significant effect on the Group's financial performance for the six months ending 31 March 2008 and which are outside the Group's control include the willingness and ability of third parties, including regulators, tax raising authorities and commercial partners, to engage and reach agreement on open matters. Any of the above and/or changes in assumptions underlying the carrying value of certain Group assets could result in asset impairments. Further information in relation to these risk factors and uncertainties can be found on pages 58 to 59 of the Group's Annual Report for the year ended 31 March 2007 which can be found on www.vodafone.com. SUBSEQUENT EVENTS On 6 October 2007, the Group announced that it had agreed to acquire Tele2 Italia SpA ('Tele2 Italy') and Tele2 Telecommunication Services SLU ('Tele2 Spain') from Tele2 AB Group for a cash consideration of â‚¬775 million (Â£537 million) on a debt free basis. Tele2 Italy and Tele2 Spain each provide nationwide fixed line telecommunications and broadband services. Tele2 Italy had over 2.6 million customers as at 30 June 2007, including over 400,000 broadband customers. Tele2 Spain had 550,000 customers as at 30 June 2007, including over 240,000 broadband customers. The transaction is expected to be completed by the end of the calendar year, following receipt of regulatory approval. RESPONSIBILITY STATEMENT We confirm that to the best of our knowledge: â€¢ the unaudited Condensed Consolidated Financial Statements have been prepared in accordance with IAS 34; and â€¢ the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R. Neither the Company nor the directors accept any liability to any person in relation to the half-yearly financial report except to the extent that such liability could arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with section 90A of the Financial Services and Markets Act 2000. By order of the Board Stephen Scott Secretary 13 November 2007 This information is provided by RNS The company news service from the London Stock Exchange

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