Interim Results - Part 1

Vodafone Group Plc 15 November 2005 VODAFONE GROUP PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2005 ******** PART I ******** VODAFONE GROUP PLC Embargo: Not for publication before 07:00 hours VODAFONE ANNOUNCES RESULTS FOR THE 15 November 2005 SIX MONTHS TO 30 SEPTEMBER 2005 Robust financial performance: * Group revenue of Â£18.3 billion. Mobile telecommunications revenue increased to Â£17.7 billion, with organic growth(1) of 5.8% * Adjusted basic earnings per share(1) increased by 8.5% to 5.37 pence. Basic earnings per share were 4.36 pence. Profit before taxation for the period was Â£4.1 billion after an impairment charge of Â£0.5 billion * Free cash flow(1) of Â£3.7 billion. Net cash inflow from operating activities, after net taxation paid of Â£0.7 billion, up 4.4% to Â£6.1 billion Investment in customer growth: * Net organic proportionate additions of 10.0 million for the period * Closing proportionate customer base of 171.0 million, representing annualised organic growth of 12.9% Continuing strong take-up of products and services: * Total 3G devices of over 4.9 million at the period end, including 4.5 million consumer devices * Mobile voice usage increased by 17.0% to 95.6 billion minutes and non-messaging data revenue grew by 29.6% to Â£1 billion Substantial increase in returns to shareholders: * Interim dividend per share increased by 15%, to 2.20 pence, giving a pay-out of approximately Â£1.4 billion. Targeting a 50% dividend pay-out ratio for the year ending 31 March 2007 * Increasing share purchase target by Â£2 billion to Â£6.5 billion for the year to March 2006. Since 1 April, Â£3.4 billion has been expended, reducing shares in issue by 3.7% (1) See page 62 for definition of terms and page 61 for use of non-GAAP financial information. Arun Sarin, Chief Executive, commented: 'I am pleased to announce another strong set of results. We have grown our customer base to 171 million and made good progress on 3G and other global products and services. We continue to outperform our competitors in most of our markets as we leverage our global scale and remain focused on delivering our strategy for growth. The Board is pleased to announce a substantial increase in returns to shareholders.' Chief Executive's Statement Vodafone Group has posted another good set of results for the first half of this financial year, underpinned by a strong operational performance. The main feature of the last six months has been the success our businesses have enjoyed in acquiring and retaining customers. Our Group added 10 million net organic proportionate mobile customers in the first half, representing annualised growth of approximately 13%. The total proportionate customer base of the Group has risen to 171 million as we continue to enjoy success in both low and high penetration markets. Our focus on customers can also be seen in the continued and accelerating growth of our 3G customer base. Our early push for 3G is delivering real benefits and we now have approximately 5 million devices. Across the markets where we have introduced the benefits of W-CDMA, I continue to believe that 3G offers Vodafone, and indeed the mobile industry, significant opportunities for growth in the future. We are now also seeing the benefits of scale introduced into the 3G world. Handset prices to Vodafone have reduced by around 30% in the last 12 months and continued improvements in functionality are all helping to deliver 3G as a mass market proposition. The Vodafone 3G service offering also continues to develop, with a major push in both music and mobile TV which will be enhanced by the rollout of HSDPA next year. I am excited about the prospects for these adjacent markets and our ability to drive new revenue streams. In light of our financial performance, we are reiterating our guidance ranges for the full year. At this stage in the year we see the likely organic proportionate mobile revenue growth to be in the middle of the 6 to 9% range we indicated in May and organic proportionate mobile EBITDA margins to be at the lower end of the flat to minus 1% range. The key trends in our business are reflected through our major geographies. First, our core European footprint is delivering solid growth and broadly flat margins. Given the competitive intensity of the European markets and our continued push for new customers, including 3G customers which tend to have a higher upfront subsidy and higher ARPUs, this is excellent progress. In Japan, execution of our turn-around is on track and I am pleased with the progress we are making. One of the key aspects of this programme is that we continue to invest in customers. The EBITDA margin declined six percentage points year on year in the first half, which together with the effects of stake changes a year ago, contributed the majority of the 1.5 percentage point fall in the total mobile proportionate EBITDA margin. In the US, our associate, Verizon Wireless, continues to lead the market for customer additions. This has led to continued strong double digit service revenue growth, with some associated margin impact. Given the development of the US market and market leading position enjoyed by Verizon Wireless, we are supportive of this strategy. The Group continues to benefit from global scale. Our One Vodafone implementation is now ramping up to ensure we can deliver full benefits from the 2008 financial year. The differentiated customer propositions we have introduced in the last 12 months are delivering value to our customers. A very good example of utilising our scale is the introduction of Vodafone Passport, which today is used by over 3 million customers across the Vodafone footprint. Shareholders should expect us to continue to leverage our unrivalled scale in the future. Inorganic growth is also a factor in our longer term development. This year we have announced acquisitions in Romania, the Czech Republic, India and South Africa as well as the disposal of our Swedish business. We will continue to focus on selective acquisitions and these recent announcements highlight our strategy of investing in growth markets. The Board has approved a 15% increase in the interim dividend to 2.20 pence per share. The Board has also indicated that it is targeting a 50% dividend pay-out ratio to be achieved for the 2007 financial year. Having taken into account the target of a 50% pay-out, growth in future dividends is expected to be in line with underlying earnings growth. The Board has also approved a Â£6.5 billion share purchase programme target for this financial year, representing an increase of Â£2 billion on the Â£4.5 billion target announced in May. The Board will continue to review the appropriate allocation of capital on an ongoing basis. Vodafone Group continues to prosper in a competitive and challenging environment. I am very satisfied with progress and believe that the Group is uniquely placed to take advantage of the many opportunities to deliver shareholder value in the future. Arun Sarin GROUP FINANCIAL AND OPERATING HIGHLIGHTS Six months to 30 September 2005 2004 Change % ---------------------------- Page Â£m Â£m Â£ Organic ---------------------------------------------------------------------------------------------------------------- Financial information Revenue 18,251 16,742 9.0 6.4 Operating profit 4,477 4,759 (5.9) Profit before taxation 4,107 4,540 (9.5) Profit for the period 2,818 3,683 (23.5) Basic earnings per share (pence) 4.36p 5.40p (19.3) Capitalised fixed asset additions 2,097 2,177 (3.7) Net cash flow from operating activities 6,084 5,827 4.4 ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- Performance reporting(1) Group EBITDA 58 6,711 6,320 6.2 3.3 Adjusted operating profit 6 4,973 4,759 4.5 3.9 Adjusted profit before tax 20 4,753 4,524 5.1 Adjusted effective tax rate 20 30.4% 29.0% Adjusted profit for the period attributable to equity shareholders 39 3,421 3,309 3.4 Adjusted basic earnings per share (pence) 39 5.37p 4.95p 8.5 Free cash flow 23 3,695 4,019 (8.1) Net debt at 30 September 23 14,093 11,081 27.2 ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- Operational Vodafone live! - active devices (million)(2)(3)(4) 35.0 11.1 215.3 3G registered devices (million)(2)(3) 4.9 0.1 Vodafone Mobile Connect data card - registered devices (million)(2)(3) 0.6 0.3 100.0 Mobile voice usage (billion minutes)(2)(3) 95.6 81.7 17.0 Non-voice services as a % of service revenue(5) 18.8% 17.7% ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- The interim results have been prepared based on the requirements of the International Financial Reporting Standards ('IFRS') issued by the International Accounting Standards Board ('IASB'). References to IFRS refer to the application of International Financial Reporting Standards, expected to be in issue and adopted for use in the European Union ('EU') for the next annual financial statements, including International Accounting Standards ('IAS') and interpretations issued by the IASB and its committees, and as interpreted by any regulatory bodies applicable to the Group. Details of the principal accounting differences from UK generally accepted accounting practices are provided on page 49 to 51. This results announcement 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 61. ---------------------------------------------------------------------------------------------------------------- See page 62 for definition of terms (1) These measures are stated excluding items not related to underlying business performance. See page 39 for a description of items not related to underlying business performance (2) Cumulative number at 30 September (3) Figures represent 100% of subsidiary information and a pro-rata share in joint ventures (4) With effect from 31 December 2004, Vodafone live! active devices in Japan have been included in the Group total as the service in Japan has become aligned with the Vodafone live! experience in other countries (5) Following a review of certain tariffs in Japan, the Group has reclassified an element of monthly fees received from contract customers from voice revenue to non-voice revenue to provide a more precise reflection of customer usage in the six months ended 30 September 2004. Further details are provided on page 6 GROUP PROPORTIONATE INFORMATION Six months to 30 September 2005 2004 Change % ---------------------------- Â£m Â£m Â£ Organic ---------------------------------------------------------------------------------------------------------------- Financial Revenue Mobile telecommunications - Germany 2,913 2,808 3.7 - Italy 2,240 2,091 7.1 - Spain 1,968 1,554 26.6 - UK 2,568 2,563 0.2 - Other mobile operations(1) 4,322 3,624 19.3 - Common functions(2) 70 58 Less: revenue between mobile operations (233) (172) ---------- ---------- 13,848 12,526 10.6 6.8 - Japan 3,619 3,122 15.9 - Associated undertakings and investments 5,948 5,139 15.7 ---------- ---------- 23,415 20,787 12.6 7.7 Other operations 602 511 17.8 Less: revenue between mobile and other operations (83) (119) ---------- ---------- 23,934 21,179 13.0 8.1 ---------- ---------- EBITDA(3) Mobile telecommunications - Germany 1,353 1,318 2.7 - Italy 1,207 1,119 7.9 - Spain 721 566 27.4 - UK 781 851 (8.2) - Other mobile operations(1) 1,503 1,334 12.7 - Common functions(2) 182 (2) ---------- ---------- 5,747 5,186 10.8 6.9 - Japan 787 864 (8.9) - Associated undertakings and investments 2,344 2,138 9.6 ---------- ---------- 8,878 8,188 8.4 4.2 Other operations 64 63 1.6 ---------- ---------- 8,942 8,251 8.4 4.2 ---------- ---------- Percentage Percentage EBITDA margin(2) Points Points Mobile telecommunications - Germany 46.4% 46.9% (0.5) - Italy 53.9% 53.5% 0.4 - Spain 36.6% 36.4% 0.2 - UK 30.4% 33.2% (2.8) - Other mobile operations(1) 34.8% 36.8% (2.0) ---------- ---------- 41.5% 41.4% 0.1 - Japan 21.7% 27.7% (6.0) - Associated undertakings and investments 39.4% 41.6% (2.2) ---------- ---------- Mobile EBITDA margin(3) 37.9% 39.4% (1.5) (1.3) (1) Excludes the results from associated undertakings. (2) Common functions represent revenue from Partner Markets and unallocated central Group income and expenses. (3) Charges for the use of the Vodafone brand and trademark have been revised with effect from 1 April 2005. The impact of the change was to reduce individual operating company EBITDA margins by up to 1.1 percentage points in the six months to 30 September 2005 though there is no material impact on mobile or Group EBITDA or EBITDA margin. See page 7 for details. Proportionate information is presented and calculated on the basis described on pages 57 to 58 See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 2005 2004 Organic Customers Million Million % Organic net proportionate customer additions in the six months to 30 September 10.0 7.4 35.1 Proportionate customers at 30 September 171.0 146.7 12.9 See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- OUTLOOK Please see 'Forward-Looking Statements' on page 60 and definition of terms on page 62. Where not explicitly stated on an organic basis, these expectations include the impact of the acquisition of interests in MobiFon in Romania and Oskar in the Czech Republic, but exclude the impact of recently announced transactions in India, Sweden and South Africa as their completion is subject to certain conditions. For the year ending 31 March 2006 ('2006 financial year') The Group expects to deliver organic growth in proportionate mobile revenue in the middle of the 6% to 9% range previously indicated. Continuing investment in customer growth is expected to result in the organic proportionate mobile EBITDA margin being at the lower end of the flat to 1 percentage point lower range when compared to the 2005 financial year. The expected fall in the proportionate mobile EBITDA margin includes a decline in the year on year EBITDA margin for Vodafone Japan for the full year similar to that experienced in the first half of the year. Group capitalised fixed asset additions are anticipated to be in the Â£5.0 billion to Â£5.4 billion range, including expenditure in Romania and the Czech Republic. The Group continues to expect free cash flow to be within the Â£6.5 billion to Â£7.0 billion range previously indicated, including free cash flow from Romania and the Czech Republic. Share purchases by the Group are targeted to be approximately Â£6.5 billion. For the year ending 31 March 2007 ('2007 financial year') The following is a summary of the key trends expected for the 2007 financial year. The Group will continue to focus on growing its operations and outperforming its competitors. Whilst strong revenue growth is expected from 3G enabled data products it is likely that the overall rate of increase in proportionate mobile revenue on an organic basis will be slightly lower than that anticipated for the 2006 financial year due to both progressively higher levels of mobile penetration and a greater impact from changes in termination rates. The Group expects to exploit opportunities to grow its customer and revenue base and consequently envisages a small decline in proportionate mobile EBITDA margins outside Japan as the benefit of efficiencies in payroll and other operating expenses arising from the One Vodafone programme are more than offset by additional investments in customer growth and changes in termination rates. In Japan, the Group remains confident that the ongoing improvements to its handset range and the accelerated build out of its 3G network will enable Vodafone Japan to increase its share of the market's overall growth in customers in the 2007 financial year. It is expected that the costs of funding this anticipated growth and the oppurtunities presented by the introduction of mobile number portability are likely to cause a further significant reduction in EBITDA margin in the 2007 financial year as the Group seeks to rebuild momentum in the business. Group capitalised fixed asset additions, including those in Romania and the Czech Republic, are likely to be slightly higher than in the 2006 financial year, with further investment in 3G coverage and commencement of the Group's rollout of HSDPA. The effective tax rate for the year is expected to increase by a similar amount to that anticipated for the full 2006 financial year due to a reduced level of one-off restructuring opportunities. It is also expected that there will be a significant increase in cash tax payments as a number of long standing tax issues are expected to reach resolution. As a result of the above factors, the Group expects free cash flow to be lower than that anticipated for the 2006 financial year. A detailed outlook, including the impact of the recently announced transactions in India, Sweden and South Africa, will be provided with the preliminary announcement of results for the 2006 financial year in May 2006. BUSINESS REVIEW ---------------------------------------------------------------------------------------------------------------- Six months to 30 September 2005 2004 % Change Â£m Â£m Â£ Organic Revenue Mobile telecommunications - Total service revenue 15,641 14,431 8.4 5.4 - Other revenue(1) 2,059 1,884 9.3 ---------- ---------- 17,700 16,315 8.5 5.8 Other operations 622 505 23.2 Less: revenue between mobile and other operations (71) (78) ---------- ---------- 18,251 16,742 9.0 6.4 ---------- ---------- Operating profit Adjusted operating profit - Mobile telecommunications 4,952 4,748 4.3 3.7 - Other operations 21 11 90.9 ---------- ---------- 4,973 4,759 4.5 3.9 Items not related to underlying business performance: - Impairment of intangible assets (515) - - - Non-operating income in associated undertakings 19 - - ---------- ---------- 4,477 4,759 (5.9) ---------- ---------- Mobile telecommunications Trading results Voice services(2) 12,705 11,875 7.0 3.9 Non-voice services(2) 2,936 2,556 14.9 12.2 ---------- ---------- Total service revenue 15,641 14,431 8.4 5.4 Net other revenue(1) 259 290 (10.7) Interconnect costs (2,377) (2,164) 9.8 Other direct costs (1,092) (986) 10.8 Net acquisition costs(1) (1,078) (1,007) 7.1 Net retention costs(1) (1,143) (900) 27.0 Payroll (1,131) (1,103) 2.5 Other operating expenses (2,451) (2,314) 5.9 ---------- ---------- EBITDA 6,628 6,247 6.1 3.1 Acquired intangibles amortisation (120) (31) Purchased licence amortisation (472) (449) 5.1 Depreciation and other amortisation (2,269) (2,103) 7.9 Share of result in associated undertakings 1,185 1,084 9.3 ---------- ---------- Adjusted operating profit 4,952 4,748 4.3 3.7 ---------- ---------- (1) Total mobile revenue includes Â£1,800 million (2004: Â£1,594 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results. (2) Following a review of certain tariffs in Japan, the Group has reclassified an element of monthly fees received from contract customers from voice revenue to non-voice revenue to provide a more precise reflection of customer usage. The impact of the change is to reduce voice revenue by Â£224m and increase messaging revenue by Â£74m and non-messaging data revenue by Â£150m for both the mobile business and Japan in the comparative period. There is no impact on service revenue or total revenue. See page 62 for definition of terms ------------------------------------------------------------------------------------------------------------------------ Group Results Total revenue increased by 9.0% to Â£18,251 million for the six months ended 30 September 2005, comprising organic growth of 6.4%, favourable movements in exchange rates of 1.4%, primarily from the Euro, and a further 1.2% from the acquisitions in the Czech Republic and Romania. Adjusted operating profit increased by 4.5% to Â£4,973 million, with underlying organic growth of 3.9%, following organic growth of 3.7% in the Group's mobile business. Favourable exchange rate movements benefited reported growth for the Group by 1.3% whilst the impact of acquisitions reduced reported growth by 0.7%, principally due to the amortisation of intangible assets resulting both from the acquisitions in the current period and the increase in the Group's effective shareholding in Japan in the prior period. The Group recorded an impairment charge to the carrying value of goodwill in Vodafone Sweden of Â£515 million to reflect the recoverable amount at 30 September 2005. This was the primary driver in the reduction in operating profit to Â£4,477 million, a decrease of 5.9% on the prior period. MOBILE TELECOMMUNICATIONS RESULTS Revenue Revenue in the mobile business increased by 8.5%, or 5.8% on an organic basis, for the six months to 30 September 2005 due to a 5.4% increase in service revenue on an organic basis and growth in other revenue. Service revenue growth reflected a 12.4% organic increase in the average customer base of the controlled mobile networks and the Group's share of jointly controlled mobile networks, offset by a decline in ARPU in a number of markets following termination rate cuts, tariff adjustments in response to increased competition and a higher proportion of lower spending prepaid customers across the Group. Voice revenue grew by 7.0%, or by 3.9% on an organic basis, with improvements in revenue from outgoing and roaming traffic offset by a decline in incoming revenue driven by termination rate cuts in several markets. Total voice minutes increased by 17.0%, driven by a larger customer base and the success of usage stimulation initiatives. These factors, counterbalanced by tariff declines, resulted in growth in outgoing revenue. Roaming revenue benefited from the launch of Vodafone Passport in the current period. An increase of 29.6% in non-messaging data revenue, to Â£989 million, was the principal driver in the growth of non-voice service revenue to Â£2,936 million for the six months to 30 September 2005, a 12.2% increase on an organic basis. Registering an additional 2,740,000 3G devices in the last six months, including 188,000 Vodafone Mobile Connect 3G/GPRS data cards, was the main factor in the non-messaging data revenue growth, along with Vodafone live! for consumers and BlackBerry(R) from Vodafone in the business segment. Messaging revenue continued to represent the largest component of non-voice revenue at Â£1,947 million for the current period, an 8.6% increase over the prior period. Other revenue increased to Â£2,059 million, principally due to growth in revenue related to acquisition and retention activities in Spain and Japan. A 27.8% rise in the number of gross customer additions, partially offset by a fall in the average revenue for handset sales to new prepaid customers, and a 23.3% increase in the number of upgrades, at a higher average price as customers upgraded to high-specification 3G handsets, led to a 12.9% growth in revenue related to acquisition and retention activities to Â£1,800 million. Adjusted operating profit Adjusted operating profit increased by 4.3% to Â£4,952 million, comprising organic growth of 3.7% and favourable exchange rate movements of 1.4% offset by the impact of acquisitions in the current and prior periods. Interconnect costs increased by 6.2% on an organic basis, as strong growth in voice usage was only partially offset by cuts in termination rates in a number of markets and an increased proportion of outgoing traffic being to other Vodafone customers, which does not result in interconnect expense. Acquisition and retention costs, net of attributable revenue, grew by 16.5% to Â£2,221 million, principally due to increased investment in retention activities, with Japan representing the largest element, as the number of upgrades grew strongly with a marginally higher average subsidy per upgrade. Payroll and other operating expenses as a percentage of service revenue decreased from 23.7% to 22.9% as the Group continued to realise cost efficiencies. The charge relating to the amortisation of acquired intangible assets increased to Â£120 million following the acquisitions in the Czech Republic and Romania in the current period and the increase in the Group's effective shareholding in Japan in the prior period. Depreciation and other amortisation increased principally due to acquisitions in the current period and the ongoing expansion of 3G networks. The Group's share of the result in associated undertakings, before items not related to underlying business performance, grew by 9.3% after the deduction of interest, tax and minority interest, and 8.5% before the deductions, primarily due to growth at SFR in France. The Group's share of the result in Verizon Wireless increased by 5.9% to Â£952 million, before deduction of interest, tax and minority interest. MOBILE TELECOMMUNICATIONS - REVIEW OF OPERATIONS Vodafone operating companies are licensed on an arms length basis to use the Vodafone brand and related trademarks. These arrangements have been reviewed and the charges for the use of the Vodafone brand and related trademarks were revised with effect from 1 April 2005 to reflect the positioning of the brand in the current markets. There is no material impact on the Group's overall operating profit or EBITDA margin. The impact of the change is to reduce individual operating company margins by up to 1.1 percentage points, depending on the operating company, with a corresponding increase in the profit attributable to the Common functions segment, which forms part of the mobile telecommunications business. GERMANY ---------------------------------------------------------------------------------------------------------------- Financial highlights Six months to 30 September 2005 2004 % Change Â£m Â£m Â£ â‚¬ Total revenue(1) 2,913 2,808 3.7 2.0 ---------- ---------- Trading results Voice services 2,225 2,185 1.8 0.2 Non-voice services 536 451 18.8 16.7 ---------- ---------- Total service revenue 2,761 2,636 4.7 3.0 Net other revenue(1) 49 69 (29.0) (30.6) Interconnect costs (394) (377) 4.5 2.8 Other direct costs (144) (158) (8.9) (9.8) Net acquisition costs (1) (179) (166) 7.8 5.5 Net retention costs(1) (180) (157) 14.6 13.0 Payroll (208) (207) 0.5 (1.7) Other operating expenses (352) (322) 9.3 7.6 ---------- ---------- EBITDA 1,353 1,318 2.7 1.0 Purchased licence amortisation (171) (168) 1.8 - Depreciation and other amortisation (407) (371) 9.7 7.9 ---------- ---------- Adjusted operating profit 775 779 (0.5) (2.1) ---------- ---------- EBITDA margin 46.4% 46.9% KPIs Closing customers ('000) 28,259 26,092 8.3 Average monthly ARPU â‚¬24.4 â‚¬25.7 (5.1) (1) Total revenue includes Â£103 million (2004: Â£103 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- Vodafone achieved strong customer growth in a competitive market, consolidated its market position in 3G offerings with innovative new products, including Mobile TV, and launched Vodafone Zuhause, an alternative to a fixed line network allowing private householders and home office users to replace their existing fixed line connection. In September 2005, Vodafone launched 3G services for prepaid customers and commenced customer trials of High Speed Downlink Packet Access ('HSDPA') technology which enables data transmission speeds of up to 2 megabits per second. Total revenue grew by 2.0%, when measured in local currency, due to a 3.0% increase in service revenue, primarily driven by a larger customer base, partly offset by lower other revenue. Competitively priced prepaid offerings including new text packages and tariff options for evening and weekend calls, selective top-up promotions and a new internet-only low cost tariff along with the success of 3G, new voice bundles and the launch of Vodafone Zuhause, led to growth in the average customer base of 8.7% compared with the comparative period. New voice bundles, which had attracted more than 4 million customers at 30 September 2005, were the main factor in the 11.1% increase in voice usage by contract customers and contributed to the 0.9 percentage points fall in contract churn to 13.7% for the period. A rise in the number of lower spending prepaid customers along with a fall in activity level and a cut in the mobile call termination rate from 14.3 eurocents to 13.2 eurocents in the second half of the previous financial year had a dilutive effect on ARPU, and particularly impacted service revenue growth in the second quarter, whilst growth in the first quarter benefited from the timing of Easter holidays compared to the prior period. Non-voice service revenue increased by 16.7% in local currency compared to the six months to 30 September 2004, primarily due to the success of non-messaging data offerings, the revenue from which increased by 75.4% in local currency, to Â£117 million. Vodafone continued to lead the 3G market in Germany with 815,000 registered 3G devices on the network at 30 September 2005, including 148,000 Vodafone Mobile Connect 3G/GPRS data cards. In the consumer segment, the number of active Vodafone live! devices increased by 13.7% over the six month period to 5,508,000 at 30 September 2005. Investment in customer retention and an increase in the Group's charge for the use of the brand and related trademarks, representing 1.1 percentage points of the change in EBITDA margin and reported in other operating expenses, led to a decrease in EBITDA margin of 0.5 percentage points to 46.4%. Interconnect costs rose broadly in line with service revenue as an 8.9% increase in total voice usage was partially offset by the termination rate cut. A higher proportion of new 3G customers, as discussed above, and a 9.2% rise in gross customer additions led to an increase of 5.5% in net acquisition costs, in local currency. Adjusted operating profit was impacted by increased depreciation charges resulting from the ongoing 3G network roll out and the disposal of assets due to the standardisation of network equipment. ITALY ---------------------------------------------------------------------------------------------------------------- Financial highlights Six months to 30 September 2005 2004 % Change Â£m Â£m Â£ â‚¬ Total revenue(1)(2) 2,240 2,091 7.1 5.3 ---------- ---------- Trading results(2) Voice services 1,816 1,720 5.6 3.8 Non-voice services 343 283 21.2 18.9 ---------- ---------- Total service revenue 2,159 2,003 7.8 6.0 Net other revenue(1) 5 5 - (13.1) Interconnect costs (366) (357) 2.5 0.9 Other direct costs (122) (112) 8.9 6.3 Net acquisition costs (1) (39) (29) 34.5 30.8 Net retention costs(1) (41) (31) 32.3 29.4 Payroll (123) (126) (2.4) (4.0) Other operating expenses (266) (234) 13.7 11.9 ---------- ---------- EBITDA 1,207 1,119 7.9 6.0 Purchased licence amortisation (37) (36) 2.8 - Depreciation and other amortisation (247) (239) 3.3 1.7 ---------- ---------- Adjusted operating profit 923 844 9.4 7.5 ---------- ---------- EBITDA margin 53.9% 53.5% KPIs Closing customers ('000)(2) 17,884 16,654 7.4 Average monthly ARPU â‚¬30.1 â‚¬30.3 (0.7) (1) Total revenue includes Â£76 million (2004: Â£83 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results. (2) Italy is a joint venture and is proportionately consolidated by the Group and hence the results and customers reported represent the Group's average effective interest, being 76.8% for the six months to 30 September 2005 (2004: 76.8%). See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- In an intensely competitive market, Vodafone continued to perform strongly in Italy through customer growth, driven by successful summer promotions, and a focus on high value customers. Average customer growth of 6.5% was achieved despite market penetration levels well in excess of 100% due to customers having more than one SIM. In local currency, total revenue increased by 5.3%, reflecting the growth in service revenue achieved from an increase in the average customer base. This was partially offset by a slight decrease in ARPU following a cut in termination rates averaging 20.5% from 1 September 2005 which impacted service revenue growth and interconnect costs in the second quarter. Strong promotional initiatives over the summer, comprising free calls and text messages for a small activation fee, were taken up by more than 4 million customers and stimulated voice and text usage. Total voice usage increased by 5.5% compared with the six months to 30 September 2004, with a higher proportion of voice minutes from calls between Vodafone customers, which do not result in interconnect costs. Targeted retention activities and a focus on high value customers led to a reduction in contract customer churn to 14.7% from 18.0% for the prior period and limited the increase in total churn, which rose over the prior period by 1.6 percentage points to 18.0%. In the business segment, the positive net customer inflow from mobile number portability continued, reflecting the attractiveness of its business offerings, including products such as the Vodafone Mobile Connect data card and Vodafone Passport. Non-voice service revenue increased by 18.9% in local currency, with revenue from messaging increasing to Â£297 million, representing growth of 15.4% in local currency. Non-messaging data revenue grew by 48.7% driven by the success of 3G offerings and a 124.2% increase in the Group's share of the number of active Vodafone live! devices over the past twelve months. At 30 September 2005, the Group's share of registered 3G devices was 1,044,000 compared with 511,000 at 31 March 2005. The EBITDA margin grew by 0.4 percentage points to 53.9%, despite an increase in the cost of acquiring and retaining customers in response to competitive pressures, though these costs remain low as a percentage of service revenue compared to other markets, and higher operating expenses from increased marketing and network costs as 3G network coverage continued to improve. In local currency, adjusted operating profit increased by 7.5% due to the same factors. JAPAN ---------------------------------------------------------------------------------------------------------------- Financial highlights Six months to 30 September 2005 2004 % Change Â£m Â£m Â£ Y Total revenue(1) 3,704 3,689 0.4 (0.4) ---------- ---------- Trading results Voice services(2) 1,889 2,015 (6.3) (6.3) Non-voice services(2) 815 830 (1.8) (1.8) ---------- ---------- Total service revenue 2,704 2,845 (5.0) (5.0) Net other revenue(1) 7 11 Interconnect costs (238) (250) (4.8) (5.1) Other direct costs (133) (119) 11.8 12.3 Net acquisition costs (1) (294) (322) (8.7) (8.9) Net retention costs(1) (460) (320) 43.8 43.3 Payroll (74) (115) (35.7) (36.4) Other operating expenses (708) (708) - (0.2) ---------- ---------- EBITDA 804 1,022 (21.3) (23.2) Acquired intangibles amortisation (68) (30) Depreciation and other amortisation (545) (569) (4.2) (4.3) ---------- ---------- Adjusted operating profit 191 423 (54.8) (57.1) ---------- ---------- EBITDA margin 21.7% 27.7% KPIs Closing customers ('000) 14,991 15,123 (0.9) Average monthly ARPU Y5,983 Y6,279 (4.7) (1) Total revenue includes Â£993 million (2004: Â£833 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results (2) Following a review of certain tariffs, the Group has reclassified an element of monthly fees received from contract customers from voice revenue to non-voice revenue to provide a more precise reflection of customer usage. More details are provided on page 6 See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- Market conditions for Vodafone in Japan continue to be challenging. Vodafone is in the process of returning to customer growth through more competitive services and pricing coupled with an improving 3G network and handset range, most recently demonstrated by the announcement of improvements to the handset range for the winter sales period. In local currency, revenue decreased marginally by 0.4% as the increase in equipment revenue related to acquisition and retention activities was offset by a 5.0% reduction in service revenue. The decrease in service revenue followed a decline in ARPU and a slight decline in the average customer base. The loss of higher value customers, following a lack of a competitive 3G offering, and the total ban on using mobile phones whilst driving introduced in November 2004, led to the reduction in ARPU. The revenue uplift from the introduction of new tariffs in the second quarter of the prior period has not been replicated in the current period. Revenue related to acquisition and retention activities improved by 19.2% in local currency due to increased sales of higher specification handsets, particularly from retention activities, which outweighed lower gross connections. New flat rate messaging and data tariffs improved the competitiveness of the non-voice offerings and were a significant contributory factor in an additional 816,000 3G devices being registered to the network in the six months to 30 September 2005, bringing the total to 1,614,000. Non-voice revenue decreased by 1.8% in local currency, to Â£815 million, as the growth in non-messaging data was offset by the loss of higher value customers. Non-messaging data revenue increased by 12.4% in local currency, to Â£615 million for the six months to 30 September 2005, resulting from higher usage of data products and services and the fact that messaging transmitted via the 3G network is reported as data revenue in Japan as 3G messages are packet-based. Investment in customer retention in response to competitive pressures contributed to a reduction in customer churn from 23.1% for the six months to September 2004 to 19.7% for the current period and, along with the dilution of ARPU and higher direct costs resulting from lower provisions for slow moving handset stocks in the comparative period, led to the EBITDA margin falling 6.0 percentage points to 21.7%. These factors were partially offset by a reduction in gross connections leading to lower net acquisition costs. Adjusted operating profit was impacted by the factors above and an increase in the amortisation of acquired intangible assets recognised following the Group's increase in its effective shareholding in Japan in the six months ended 30 September 2004. On 9 November 2005, the government of Japan awarded two licences for 1.7GHz and one licence for 2.0GHz spectrum to potential new mobile market entrants. These licences carry obligations to deploy national coverage within an allocated time frame. The new market entrants are expected to start limited service from late 2006. SPAIN ---------------------------------------------------------------------------------------------------------------- Financial highlights Six months to 30 September 2005 2004 % Change Â£m Â£m Â£ â‚¬ Total revenue(1) 1,968 1,554 26.6 24.6 ---------- ---------- Trading results Voice services 1,546 1,246 24.1 22.1 Non-voice services 251 180 39.4 37.1 ---------- ---------- Total service revenue 1,797 1,426 26.0 24.0 Net other revenue(1) 1 1 - - Interconnect costs (323) (266) 21.4 19.5 Other direct costs (155) (117) 32.5 29.5 Net acquisition costs (1) (123) (115) 7.0 5.5 Net retention costs(1) (114) (75) 52.0 48.7 Payroll (76) (66) 15.2 13.4 Other operating expenses (286) (222) 28.8 26.8 ---------- ---------- EBITDA 721 566 27.4 25.5 Purchased licence amortisation (34) (34) - - Depreciation and other amortisation (158) (135) 17.0 14.5 ---------- ---------- Adjusted operating profit 529 397 33.2 31.4 ---------- ---------- EBITDA margin 36.6% 36.4% KPIs Closing customers ('000) 12,418 10,452 18.8 Average monthly ARPU â‚¬37.0 â‚¬35.4 4.5 (1) Total revenue includes Â£170 million (2004: Â£127 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- Vodafone continued to deliver strong growth in Spain through a focus on customer growth, targeted summer campaigns and excellent customer service, as well as the retention of high value customers, alongside propositions encouraging both customer transition from prepaid to contract and increased voice usage. In local currency, total revenue for the six months to 30 September 2005 increased by 24.6%, principally as a result of a 24.0% rise in service revenue. The average customer base grew by 18.8% owing to 1,967,000 new customers from the successful summer campaign and attractive tariffs combined with a successful customer retention strategy and net inflow of customers from mobile number portability. Additionally, a continuing campaign encouraging customers to switch from prepaid to contract helped the percentage of contract customers increase from 45.4% at 30 September 2004 to 48.0% at 30 September 2005. Growth of 38.0% in voice usage, driven by promotions, a larger customer base and a higher proportion of contract customers, resulted in a 4.5% increase in ARPU, despite a 10.5% cut in termination rates in November 2004. Non-voice service revenue increased by 37.1%. Promotions encouraging usage resulted in text message volumes increasing by 26.6% in the six months to 30 September 2005. Although messaging remains the principal driver for the rise in non-voice service revenue, non-messaging data revenue continues to increase its share of non-voice service revenue, increasing by 85.7% in local currency to Â£46 million. This is driven by the success of 3G services, with 315,000 devices registered by 30 September 2005, and Vodafone live!, which has 4,132,000 devices using the service. The EBITDA margin for the six months to 30 September 2005 increased by 1.3 percentage points compared to the prior period, excluding an increase in the Group charge for use of the brand and related trademarks which resulted in a 1.1 percentage point fall in EBITDA margin. Both acquisition costs and interconnect costs fell as a proportion of service revenue, the latter due to the cut in termination rates combined with promotions focusing on calls to Vodafone and fixed-line numbers, which incur lower interconnect costs. These falls were counteracted by a 48.7% rise in net retention costs, which resulted from a focus on retaining customers and led to a reduction in churn levels from 23.0% for the six months to 30 September 2004 to 21.2% for the current period. Other direct costs increased 29.5%, primarily as a result of an increase in content provision costs arising from the increase in data traffic. UNITED KINGDOM ---------------------------------------------------------------------------------------------------------------- Financial highlights Six months to 30 September 2005 2004 % Change Â£m Â£m Total revenue(1) 2,568 2,563 0.2 ---------- ---------- Trading results Voice services 1,864 1,879 (0.8) Non-voice services 453 404 12.1 ---------- ---------- Total service revenue 2,317 2,283 1.5 Net other revenue(1) 68 93 (26.9) Interconnect costs (438) (410) 6.8 Other direct costs (180) (189) (4.8) Net acquisition costs (1) (216) (186) 16.1 Net retention costs(1) (199) (198) 0.5 Payroll (205) (208) (1.4) Other operating expenses (366) (334) 9.6 ---------- ---------- EBITDA 781 851 (8.2) Acquired intangibles amortisation (2) - Purchased licence amortisation (166) (166) - Depreciation and other amortisation (293) (289) 1.4 ---------- ---------- Adjusted operating profit 320 396 (19.2) ---------- ---------- EBITDA margin 30.4% 33.2% KPIs Closing customers('000) 15,764 14,600 8.0 Average monthly ARPU Â£24.9 Â£26.6 (6.4) (1) Total revenue includes Â£183 million (2004: Â£187 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- The UK continues to be one of the most competitive markets in which Vodafone operates, with among the highest penetration rates in Europe. Nevertheless, Vodafone has maintained its lead in revenue market share and has continued to be successful in attracting customers and generating additional usage, particularly by contract customers, through enhancing consumer offerings and building on leadership in business. Total revenue for the six months to 30 September 2005 increased marginally, as the benefits of a growing customer base and increasing non-voice revenue were negated by a fall in other revenue and the 30% cut in termination rates introduced on 1 September 2004 for all UK mobile network operators, excluding the new third generation operator. ARPU fell by 6.4%, as reduced voice ARPU, including the effect of the termination rate cut and a higher proportion of lower spending prepay customers, was partially offset by growth in non-voice revenue. Excluding the impact of the termination rates cut, service revenue grew by 4.8%, principally due to an 8.7% increase in the average customer base. Increased investment in acquisition activity and enhanced consumer offerings drove customer growth in the six months to 30 September 2005. Contract net additions increased 31.8% for the six months to 30 September 2005 compared to the same period last year despite a slight reduction in the net acquisition cost per gross addition. Consumer offerings launched in the period included the 'Stop the Clock' proposition which allows customers on 18 month contracts to talk off-peak for up to 60 minutes and only pay for 3 minutes. In the business segment, the 'Perfect Fit for Business' tariffs increased revenue and usage. The principal driver behind the 12.1% rise in non-voice revenue was an increase of 57.9% in non-messaging data revenue to Â£103 million, primarily due to the success of offerings such as Vodafone live!, with 3,963,000 active devices at 30 September 2005, 3G, with 438,000 registered devices including 97,000 business devices, and BlackBerry(R) from Vodafone with 179,000 registered devices. Investments in customer acquisition, a rise in interconnect costs and provisions for one-off call centre closures led to a fall in EBITDA margin of 1.8 percentage points, with an additional 1.0 percentage point of the fall due to the increase in the Group charges for use of the brand and related trademarks. The increased investment in acquisition activity along with broadly stable contract churn has led to growth in the customer base, including higher spending contract customers, and provides a strong platform for future growth. Contract churn in the current period benefited from focused upgrade activity and a higher proportion of the customer base being on 18 month contracts. An increase in the proportion of upgrades through Vodafone's own channels enabled net retention costs to be kept stable despite a 9.4% rise in the volume of upgrades. Interconnect costs increased as total voice usage grew by 9.6%, driven by a higher customer base, usage stimulation initiatives for contract customers such as 'Stop the Clock' and a higher proportion of outgoing calls made to other mobile networks, partially offset by the impact of termination rate cuts. AMERICAS - Verizon Wireless ---------------------------------------------------------------------------------------------------------------- Financial highlights Six months to 30 September 2005 2004 % Change Â£m Â£m Â£ $ Adjusted operating profit 772 738 4.6 5.2 ---------- ---------- Share of result in Operating profit 952 899 5.9 6.3 associated Interest (100) (92) 8.7 undertakings Tax (54) (44) 22.7 Minority interest (26) (25) 4.0 ---------- ---------- 772 738 4.6 5.2 ---------- ---------- Proportionate revenue 3,916 3,433 14.4 Proportionate EBITDA margin 37.1% 39.3% KPIs Closing customers ('000) 49,291 42,118 17.0 Average monthly ARPU $51.6 $53.2 (3.0) Acquisition and retention costs as a percentage of service revenue 13.2% 12.3% See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- The US market has recently experienced considerable consolidation, including the mergers of Cingular and AT&T Wireless, Sprint and Nextel, and Alltel and Western Wireless. Penetration has reached approximately 66% as at 30 June 2005, with Verizon Wireless' customer market share at approximately 24%. Despite the consolidation, Verizon Wireless continued to outperform its competitors, ranking first in customer net additions for the six months to 30 September 2005, with the total customer base increasing by 8.4% in the current period to 49,291,000. The strong customer growth has benefited from a churn rate which is amongst the lowest in the US mobile industry and which has continued to improve from 17.9% for the six months to 30 September 2004 to 15.1% for the current period. In local currency, proportionate service revenue increased by 13.6%, driven by the larger customer base offset by a decrease in ARPU. The ARPU decline of 3.0% was primarily due to tariff pricing changes earlier in 2005 and increases in the size of bundled minute plans. The growth in the customer base and the larger bundle sizes contributed to a 35% growth in total minutes of use. Non-voice service revenue increased by 96.9% over the prior period and represented 7.5% of service revenue in the six months to 30 September 2005. Non-voice revenue growth was primarily generated by increased SMS and MMS usage and growth in new products including V CAST(SM), VZMail and BroadbandAccess. V CAST(SM) and BroadbandAccess are delivered over Verizon Wireless' EV-DO network, which is expected to cover nearly half of the population by the end of 2005. The EBITDA margin remained strong, but declined from 39.3% in the prior period to 37.1%. The margin reduction was primarily caused by lower ARPU and increased costs of acquisition and retention resulting from the industry leading customer growth. In local currency, the Group's share of Verizon Wireless' operating profit increased by 6.3%. The Group's share of the tax attributable to Verizon Wireless of Â£54 million for the six months to 30 September 2005 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. Vodafone and Verizon Wireless are engaged in a number of joint projects to bring global services to their customers. In September 2005, Vodafone and Verizon Wireless jointly launched a two card international data roaming solution which allows Vodafone's customers to use Verizon Wireless' broadband coverage in the US and provides Verizon Wireless' customers with coverage in 50 countries globally. Verizon Wireless has recently strengthened its spectrum position with the closing of the purchase of several key spectrum licences, including licences from NextWave, Leap Wireless, Metro PCS, and through participation in the FCC's Auction 58. OTHER MOBILE OPERATIONS ---------------------------------------------------------------------------------------------------------------- Financial highlights Six months to 30 September 2005 2004 % Change Â£m Â£m Â£ Organic Total revenue Subsidiaries 3,826 3,176 20.5 Joint ventures 632 548 15.3 Less: intra-segment revenue (17) (12) ---------- ---------- 4,441 3,712 19.6 10.9 ---------- ---------- Adjusted Subsidiaries 706 717 (1.5) operating profit Joint ventures 170 133 27.8 Associated undertakings 413 346 19.4 ---------- ---------- 1,289 1,196 7.8 4.5 ---------- ---------- Trading results Voice services 3,536 2,975 18.9 Non-voice services 568 427 33.0 ---------- ---------- Total service revenue 4,104 3,402 20.6 Net other revenue(1) 62 51 21.6 Interconnect costs (819) (668) 22.6 Other direct costs (345) (277) 24.5 Net acquisition costs (1) (228) (189) 20.6 Net retention costs(1) (149) (119) 25.2 Payroll (307) (257) 19.5 Other operating expenses (733) (572) 28.1 ---------- ---------- EBITDA 1,585 1,371 15.6 5.4 Acquired intangibles amortisation (50) - Purchased licence amortisation (63) (44) 43.2 Depreciation and other amortisation (596) (477) 24.9 Share of result in associates 413 346 19.4 ---------- ---------- Adjusted operating profit 1,289 1,196 7.8 4.5 ---------- ---------- EBITDA margin 35.7% 36.9% Share of result Operating profit 598 529 13.0 in associates Interest (7) (5) Tax (178) (178) ---------- ---------- 413 346 19.4 ---------- ---------- (1) Total revenue includes Â£275 million (2004: Â£259 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- Total revenue for the Group's Other Mobile Operations increased by 19.6%, or 10.9% on an organic basis. Favourable exchange rate movements represented 3.3% of the difference between reported and organic growth, whilst the acquisitions in the Czech Republic and Romania in the six months to 30 September 2005 increased reported growth by 5.4%. The organic increase in total revenue was driven principally by organic service revenue growth, which improved as a result of growth in average customers of 23.5% excluding the impact of the acquisitions, and by 36.5% including the acquisitions, offset by cuts in termination rates in certain markets and ARPU dilution from tariff adjustments and from an increase in the number of lower usage prepaid customers. Non-voice service revenue continued to grow strongly and represented 13.8% of service revenue for the six months to 30 September 2005. Investment in customer retention and an increase in the Group's charge for the use of the brand and related trademarks amounting to a 0.6 percentage points fall in the EBITDA margin, partially offset by the higher margins of the acquisitions, led to a decrease in the EBITDA margin to 35.7%. Adjusted operating profit increased by 7.8% and 4.5% on an organic basis over the comparative period, with 0.4% of the difference due to the acquisitions in the current period and 2.9% resulting from favourable foreign exchange rate movements. Higher depreciation and purchased licence amortisation, following the launch of 3G services, and amortisation of identifiable intangible assets from the acquisitions in the Czech Republic and Romania, impacted the reported growth in adjusted operating profit for the six months to 30 September 2005. Other Mobile subsidiaries Local currency service revenue grew by 7.3% in Greece due to a 12.7% increase in the average customer base offset by a reduction in ARPU due primarily to the reduced rates for incoming traffic. In Egypt, service revenue grew by 34.6% in local currency as a result of the average customer base increasing by 57.8%, primarily driven by attractive tariffs, especially in the prepaid market, and the success of innovative new products and services, such as allowing the transfer of airtime between customers. A cut in average termination rates of approximately 24% in Portugal in March 2005 and an increase in value-added taxes led to service revenue growth being restricted to 0.9% in spite of an 11.2% rise in the average customer base and strong growth in non-voice revenue following the success of 3G service offerings. The market in Sweden continued to be challenging due to intense competition driving down prices, with a 3.2% decline in service revenue in spite of strong growth in non-voice service revenue, an increase in average customers and a higher proportion of contract additions resulting from increased acquisition investment. On 31 October 2005, the Group announced that its 100% interest in Vodafone Sweden is to be sold to Telenor, the pan-Nordic telecommunications operator. The sale is expected to be completed by 31 December 2005, subject to EU regulatory approval. Vodafone and Telenor have agreed the terms of a Partner Network Agreement in Sweden, allowing Vodafone Sweden and Vodafone customers to continue to benefit from Vodafone's global brand, products and services in Sweden. In the Netherlands, a 5.8% increase in service revenue was achieved in a highly competitive market through continued growth in the customer base, stimulated by attractive price plans and the launch of 3G. In Ireland, customer growth and the success of non-voice offerings led to a 6.7% increase in service revenue. In the intensely competitive Australian market, the success of new bundled plans led to customer growth of 14.3% and a significant increase in voice usage, which also adversely impacted interconnect costs. In local currency, service revenue rose by 6.3%, despite a decline in ARPU due to the large number of customers migrating to the new tariffs. 3G services were launched on 31 October 2005. Other Mobile joint ventures Average proportionate customers for the Group's joint ventures, excluding Italy, increased by 39.0% in the six months to 30 September 2005, with particularly strong growth in markets with relatively low penetration rates, particularly South Africa. The customer growth generated a 27.8% rise in adjusted operating profit. Other Mobile associated undertakings In France, mobile to mobile termination fees were introduced for the first time in 2005. As a result, SFR experienced a significant increase in incoming revenue, with a similar sized increase in interconnection costs. Excluding the impact of mobile to mobile termination fees, SFR reported strong growth in revenue and operating profit, principally due to an 8.1% increase in average customers compared to the prior period. Usage of both voice and non-voice services grew in the period, and SFR had a total of 3,823,000 Vodafone live! customers at 30 September 2005. Since launching consumer 3G services in November 2004, SFR has established a customer base of 399,000 at 30 September 2005. Other Mobile investments China Mobile, in which the Group has a 3.27% stake, and which is accounted for as an available-for-sale investment, grew its customer base by 9.8% over the six months to 234.9 million at 30 September 2005. Dividends of Â£41 million were received in the six months to 30 September 2005. Other Operations ---------------------------------------------------------------------------------------------------------------- Financial highlights Period ended 30 September 2005 2004 % Change Â£m Â£m Â£ Revenue Germany 622 505 23.2 ---------- ---------- Adjusted operating profit Germany 38 17 123.5 France (17) (6) ---------- ---------- 21 11 90.9 ---------- ---------- See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- Other operations comprise interests in fixed line telecommunications businesses in Germany and France. Germany In local currency, Arcor's revenue increased by 21.0%, primarily due to customer and usage growth, partially offset by tariff decreases in the competitive market. The incumbent fixed line market leader continues to drive this intense competition, although Arcor further strengthened its position as the main competitor. Contract ISDN voice (direct access) customers increased by 57% to 1,120,000 and contract DSL (broadband internet) customers by 90% to 863,000 in the six months to 30 September 2005. The revenue growth and further cost efficiencies led to an improvement in EBITDA. France The Group's associated undertaking, Cegetel, merged with neuf telecom on 22 August 2005, leaving Vodafone with a proportionate interest of 12.4% in the enlarged group, neuf cegetel. GLOBAL SERVICES One Vodafone The One Vodafone initiatives are targeted at achieving savings in operating expenses and enhancing revenue for the Group's controlled mobile businesses and the Group's jointly controlled mobile business in Italy. The Group expects that, in the year ending 31 March 2008 ('2008 financial year'), operating expenses, being the aggregate of payroll, other operating expenses, and capitalised fixed asset additions, will be broadly similar to those for the year ended 31 March 2004, assuming no significant changes in exchange rates and after adjusting for acquisitions and disposals. The Group is targeting mobile capitalised fixed asset additions in the 2008 financial year to be 10% of mobile revenue as a result of the initiatives. Revenue enhancement initiatives are expected to deliver benefits equivalent to at least 1% additional revenue market share in the 2008 financial year compared with the 2005 financial year. The Group will measure the revenue benefits in its four principal controlled markets and jointly controlled market in Italy compared to its established competitors. The objective for the current financial year ('2006 financial year') has been to begin implementation of the plans outlined last year. Significant benefits are expected in the 2007 financial year, with the full targets expected to be met in the 2008 financial year. The One Vodafone programme has focused on six key initiatives as follows: * The network initiative has developed plans in the radio area to standardise specifications for base stations and accessories to leverage buying power and improve efficiency in, for example, power consumption and leased line usage. In core networks, the Group is advancing towards an all IP network, thereby simplifying and reducing the number of component parts and leading to lower costs. Through increasing the amount of self built transmission, both through microwave links and owned dark fibre, costs should be reduced and future cost escalation limited as the volume of data traffic grows. * The service platforms initiative is creating shared service centres to host the European development and operations of services. The shared service Vodafone live! portal is now providing a hosting service for five operating companies and more are planned to migrate in the current financial year. Other platforms are also being migrated and new services are being implemented for the first time on the shared service platform only. The centralisation is designed not only to reduce costs but also to increase revenue through reduced time to market for new products and services. * IT is the most complex initiative and focuses on the two areas of data centres and application consolidation. For data centres, which host the servers to support billing and customer relationship management ('CRM') systems, consolidation is underway and one organisation has been created in Europe with the objective of reducing eleven centres down to three. Data centres represent around 25% of the overall Group IT cost and plans are in place to reduce this cost by over 20%. The larger part of the IT effort is focused on application consolidation, a highly complex and business critical multi-year project, which will continue through to 2008 and beyond. * The customer management programme is initially focused on implementing best practice across the Group. In the longer term, the objective is to implement a single CRM system. In the first half of the 2006 financial year, a single help desk for multi-national customers and centralised support for our roaming customers have been launched. * The focus of the terminals programme is to reduce the number of terminals in the overall range, increasing the number of customised terminals to drive cost reductions. In addition, complexity in the terminals should be reduced by standardising components and moving to a smaller number of technology platforms. It is expected that these activities will drive incremental revenue benefits, as well as cost savings, through reduced churn and higher ARPU per handset. * Finally, the focus of the roaming initiative is to transform customers' roaming experience, primarily through reducing barriers to usage. Vodafone Passport has been launched in twelve countries and initial take-up has been encouraging. Improvements in customer satisfaction and a higher proportion of customers roaming on to Vodafone networks have been noted since launch. Vodafone live! Vodafone live!, the Group's integrated communications and multimedia proposition, has continued to grow strongly. The proposition, targeted primarily at the 'young active fun' segment, is available in 23 markets, comprising 16 of the Group's controlled and jointly controlled networks, three of the Group's associated companies and four Partner Markets. There were 35.0 million Vodafone live! active devices, including 12.8 million in Japan, on controlled and jointly controlled networks at 30 September 2005, with an additional 4.7 million devices connected in the Group's associated companies. In June 2005, Vodafone announced plans to launch a seamless instant messaging service between PCs and mobile phones. Mobile Instant Messaging will work seamlessly with Microsoft's MSN Messenger, delivering an enhanced messaging offer for MSN and Vodafone customers who want to stay in touch with friends, family and colleagues. Vodafone live! with 3G In November 2004, the Group launched Vodafone live! with 3G across 13 markets with an initial portfolio of 10 handsets. At 30 September 2005, Vodafone live! with 3G has been launched in a further three markets (New Zealand, South Africa and Belgium), and is now available on 25 handsets. There were 4.5 million devices registered in controlled and jointly controlled networks with the capability of accessing the Vodafone live! with 3G portal at 30 September 2005. Since then, Vodafone live! with 3G has been launched in a further two markets (Croatia and Australia) making it available in 18 markets in total. Vodafone live! with 3G customers can now experience news broadcasts, sports highlights, full track music downloads, music videos, movie trailers and a host of other video content at a quality approaching that of digital television. TV broadcast services have now been launched in ten of the Group's controlled and jointly controlled networks, three associated companies and one Partner Market, and these will be developed further in the coming year. The wide bandwidth of 3G supports access to sophisticated 3D games and Vodafone has introduced a range of branded titles. Vodafone Passport The Vodafone Travel Promise was launched during May 2005, the first element of which is the Vodafone Passport voice roaming price plan which provides customers with greater price clarity when using their mobile voice services abroad. For a one-off connection fee per call determined by the network operator, customers who sign up to the Vodafone Passport price plan can make voice calls at domestic rates when roaming on Vodafone's controlled networks (excluding Egypt) and the networks of selected joint ventures and associated companies. In addition, when receiving calls abroad, customers will pay the same connection fee, allowing them to talk for up to a maximum of 60 minutes, for no additional charge. Vodafone Passport has been launched in twelve markets with over 2.8 million customers registered in the Group's controlled and jointly controlled networks by 30 September 2005. Forming part of the Vodafone Travel Promise, a second roaming pricing initiative was launched in June 2005. This new data roaming tariff, specifically tailored to suit the needs of our business customers, offers simple and predictable roaming pricing. For a flat rate, customers can send or receive large volumes of data when using the Vodafone Mobile Connect service on participating Vodafone networks. Plans are in place to further develop the Vodafone Travel Promise through the addition of improved geographical coverage and additional services to assist our customers when calling from abroad. Vodafone Simply Vodafone Simply, the Group's proposition designed for people who just want to make calls and send texts with minimum complexity, was launched in May 2005. At 30 September 2005, Vodafone Simply was available in 12 markets, comprising nine of the Group's controlled and jointly controlled networks, one of the Group's associated companies and two Partner Markets. Plans are in place to launch this proposition in an additional four markets during November 2005, including Italy. Business services During the year, the Group has continued to strengthen its business voice and data offerings along with expansion of distribution channels. In the voice offering, the Vodafone Wireless Office proposition - a solution reducing the need for fixed line phones - has been enhanced with an increased handset range, superior call management software, a special tariff structure and availability across a broader geography. At 30 September 2005, Vodafone Wireless Office hit a significant milestone, achieving over one million customers across nine markets. Significant steps have been made in the area of data services. The Vodafone Mobile Connect 3G/GPRS data card has now been rolled out across 19 markets, including three of the Group's associated companies and three Partner Markets. The product portfolio was enhanced in the period with the launch of a quad-band data card allowing customers to connect whilst travelling in the US and a data card supporting both GPRS and EDGE technology which provides high speed connectivity in a number of the Group's Partner Markets. These data cards are available in an increasing number of distribution channels and with a growing range of service and price bundles. Vodafone, Linksys and Cisco Systems announced the launch of the 3G/UMTS Router in September 2005. The 3G/UMTS Router allows teams of up to five people, enabled with wireless LAN capability already built in to most laptop computers, to simultaneously access high speed mobile data services provided by the Group's 3G networks. This extends the benefits of the Vodafone Mobile Connect proposition from individuals to teams. At 30 September 2005, the 3G/UMTS Router was available in Italy and Spain and has since been introduced in a further three markets. In April 2005, the Group announced the roll out of push email, a service providing real-time, secure and remote access to email, contacts and calendar direct to a range of business-focused mobile devices. During the launch phase, which will last until the end of this calendar year, the service will be supported by six devices, with additional devices introduced in the coming months. Meeting the needs of business customers for predictable pricing, Vodafone has launched a domestic data tariff with unlimited usage and a roaming data tariff bundled with large volumes of data. Domestic flat rate data tariffs have been launched in most markets, including Germany, the Netherlands, Italy, Spain and the UK. FINANCIAL UPDATE INCOME STATEMENT Investment income and Financing costs Six months to Six months to 30 September 30 September 2005 2004 Â£m Â£m Investment income 259 321 Financing costs (630) (556) ---------- ---------- (371) (235) ========== ========== Analysed as: - Net financing costs before dividends from investments (137) (132) - Potential interest charges arising on settlement of outstanding tax issues (124) (122) - Change in fair value of equity put option (151) - - Dividends from investments 41 19 ---------- ---------- (371) (235) ========== ========== Net financing costs before dividends from investments increased by 3.8% to Â£137 million, with a 28% increase in average net debt compared to the six months to 30 September 2004 partially offset by the benefit of a change in the currency mix of borrowings, an increase in the level of average cash balances held in sterling and the repayment of fixed rate bonds in the year to 31 March 2005. Taxation Six months to Six months to 30 September 30 September 2005 2004 Â£m Â£m Tax on profit 1,289 857 Share of associated undertakings' tax 232 224 Tax items not related to underlying business performance: - Deferred tax asset recognised on shareholder and regulatory approval of the merger of Vodafone K.K. and Vodafone Holdings K.K. - 303 ---------- ---------- Adjusted tax on profit 1,521 1,384 ========== ========== Profit before tax 4,107 4,540 Less: Share of associated undertakings' non-operating income (19) - Items not related to underlying business performance: - Other income and expense 515 - - Non-operating income and expense (1) (16) - Change in fair value of equity put option 151 - ---------- ---------- Adjusted profit before tax 4,753 4,524 Add: Share of associated undertakings' tax and minority interest 250 248 ---------- ---------- Adjusted profit before tax for the purpose of calculating adjusted effective tax rate 5,003 4,772 ========== ========== Adjusted effective tax rate 30.4% 29.0% ========== ========== The adjusted effective tax rate for the six months to 30 September 2005, which is based on the expected effective tax rate for the year ending 31 March 2006, is 30.4% compared to 29.0% for the prior period. The Group's effective tax rate is lower than the Group's weighted average tax rate of 35.0%, as a result of the buy back of shares in Vodafone Italy and favourable tax settlements, but has increased compared to the comparable period as the prior period results benefited from finalising the reorganisation of the Group's German operations. Earnings per share Adjusted earnings per share increased by 8.5% from 4.95 pence to 5.37 pence for the six months to 30 September 2005. Basic earnings per share fell from 5.40 pence to 4.36 pence for the current period. Adjusted earnings per share is stated before a charge of 0.24 pence per share for the change in fair value of equity put options, a further charge of 0.81 pence per share in relation to an impairment of the carrying value of goodwill of Vodafone Sweden and a credit of 0.04 pence per share for other items not related to underlying business performance. In the six months to 30 September 2004, adjusted earnings per share was stated before a credit of 0.45 pence per share in relation to a deferred tax asset recognised on the approval of the merger of Group entities in Japan. Total shareholder returns The Company provides returns to shareholders through a combination of dividends and share purchases. 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. In considering the level of dividends, the Board takes account of the outlook for earnings growth, operating cash flow generation, capital expenditure requirements, acquisitions and divestments, together with the amount of debt and share purchases. Accordingly, the directors have declared an interim dividend of 2.20 pence per share, representing a 15% increase over last year's interim dividend. The Board has also indicated that it is targeting to achieve a dividend pay-out ratio of 50% for the 2007 financial year, being the declared interim and proposed final dividends per share as a percentage of adjusted earnings per share. The pay-out ratio for the 2005 financial year was 42%. After taking into account this target, it is the intention to grow future dividends on an annual basis in line with underlying earnings growth. The ex-dividend date is 23 November 2005 for ordinary shareholders, the record date for the interim dividend is 25 November 2005 and the dividend is payable on 3 February 2006. Share purchases When considering how increased returns to shareholders can be provided in the form of share purchases, the Board reviews the free cash flow, anticipated cash requirements, dividends, credit profile and gearing of the Group. The Board will continue to consider share purchase programmes, subject to the maintenance of single A credit ratings. On 24 May 2005, the directors allocated Â£4.5 billion to the share purchase programme for the year to March 2006. At the Company's Annual General Meeting ('AGM') on 26 July 2005, the Company received shareholder approval to purchase up to 6.4 billion shares through to the next AGM, expected to be held in July 2006. Shares can be purchased on market on the London Stock Exchange at a price not exceeding 105% of the average middle market quotation for such shares on the five business days prior to the date of purchase and otherwise in accordance with the rules of the Financial Services Authority. Purchases are made only if accretive to earnings per share, excluding items not related to underlying business performance. The Board has decided to allocate a further Â£2 billion to the share purchase programme for the year to March 2006, raising the total allocated for the year to Â£6.5 billion. For the period from 1 April 2005 to 14 November 2005, the Company purchased 2,407 million shares at a cost of Â£3.4 billion. In addition to ordinary market purchases, the Company has placed irrevocable purchase instructions prior to the start of close periods and in advance of quarterly KPI announcements. Share purchases since 1 April 2005 were as follows: Number of shares Total Purchases made between purchased consideration (1) Purchase arrangements Million Â£ million 1 April and 23 May 2005 406 565 Irrevocable purchase instructions 24 May and 10 July 2005 764 1,049 Ordinary market purchases 11 July to 27 July 2005 225 325 Irrevocable purchase instructions 28 July to 30 September 2005 572 863 Ordinary market purchases ---------- ---------- 1 April to 30 September 2005 1,967 2,802 1 October and 14 November 2005 440 648 Irrevocable purchase instructions (1) Includes stamp duty and broker commissions For the period from 1 April 2005 to 30 September 2005, the average share price paid, excluding transaction costs, was 141.7 pence, compared with the average volume weighted price over the same period of 142.6 pence. Shares purchased are held in treasury in accordance with section 162 of the Companies Act 1985. At 30 September 2005, 5,517 million shares were held in treasury, which increased to 5,943 million shares at 14 November 2005. Treasury shares The Companies Act 1985 permits companies to purchase their own shares out of distributable reserves and to hold shares with a nominal value not to exceed 10% of the nominal value of their issued share capital in treasury. If shares in excess of this limit are purchased they must be cancelled. It is expected that cancellations will commence in 2006. Whilst held in treasury no voting rights or pre-emption rights accrue and no dividends are paid in respect of treasury shares. Treasury shares may be sold for cash; transferred (in certain circumstances) for the purposes of an employee share scheme; or cancelled. If treasury shares are sold, such sales are deemed to be a new issue of shares and will accordingly count towards the 5% of share capital which the Company is permitted to issue on a non pre-emptive basis in any one year as approved by its shareholders at the AGM. Distributable reserves are increased by the proceeds of any sale of treasury shares up to the amount of the original purchase price, whereas no increase would arise from the sale of non-treasury shares. Any excess above the original purchase price must be transferred to the share premium account. Cash flows and funding During the six months to 30 September 2005, the Group increased its net cash inflow from operating activities by 4.4% to Â£6,084 million and generated Â£3,695 million of free cash flow, as analysed in the following table: Six months to 30 September 2005 2004 Â£m Â£m % change Net cash inflow from operating activities 6,084 5,827 4.4 Add: Taxation 667 417 Net capital expenditure on intangible assets and property, plant and equipment (2,570) (2,515) 2.2 --------------------------------------------------------------------------------------------------------- Purchase of intangible fixed assets (252) (329) (23.4) Purchase of property, plant and equipment (2,328) (2,204) 5.6 Disposal of property, plant and equipment 10 18 (44.4) --------------------------------------------------------------------------------------------------------- ---------- ---------- Operating free cash flow 4,181 3,729 12.1 Taxation (667) (417) 60.0 Dividends received from associated undertakings (1) 375 947 (60.4) Dividends paid to minority interests in subsidiary undertakings (21) (18) 16.7 Net interest paid (173) (222) (22.1) --------------------------------------------------------------------------------------------------------- Dividends received from investments 41 18 127.8 Interest received 135 194 (30.4) Interest paid (345) (430) (19.8) Interest element of finance leases (4) (4) - --------------------------------------------------------------------------------------------------------- ---------- ---------- Free cash flow 3,695 4,019 (8.1) ========== ========== (1) Six months to 30 September 2005 includes Â£295 million (2004: Â£423 million) from the Group's interest in SFR and Â£79 million (2004: Â£447 million) from Verizon Wireless Free cash flow decreased primarily as a result of lower dividends received from associated undertakings, counterbalanced by an improved net cash inflow from operating activities. An analysis of net debt is as follows: At 30 September At 1 April 2005 2005 Â£m Â£m Cash and cash equivalents 1,400 3,769 Bank overdrafts (37) (43) ---------- ---------- 1,363 3,726 ---------- ---------- Trade and other receivables(1) 478 329 Short-term borrowings (1,989) (1,960) Long-term borrowings (13,945) (13,190) ---------- ---------- (15,456) (14,821) ---------- ---------- Net debt (14,093) (11,095) ========== ========== (1) Certain mark to market adjustments on financing instruments are included within trade and other receivables Reconciliation of movement in net debt: Â£m Net debt at 1 April 2005 (11,095) Change in net debt resulting from cash flows (2,190) Net debt acquired with subsidiary undertakings (570) Exchange differences (141) Other (97) ---------- Net debt at 30 September 2005 (14,093) ========== The Group remains committed to maintaining a solid credit profile, and following a one notch upgrade in the long term credit rating from Standard & Poor in October 2005, holds ratings of P-1/F1/A-1 short term and A2/A/A+ long term from Moody's, Fitch Ratings and Standard & Poor's, respectively. Credit ratings are not a recommendation to purchase, hold or sell securities, in as much 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. In aggregate, the Group has committed facilities of approximately Â£7,206 million, of which Â£5,842 million was undrawn at 30 September 2005. The undrawn facilities include a $4.7 billion Revolving Credit Facility that matures in June 2012 and a $5.5 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 and both facilities were undrawn at 30 September 2005. In addition, the Group has a Y600 billion shelf programme in Japan, though no bonds have been issued under this programme. Other undrawn facilities of Â£64 million are specific to the Group's subsidiary in Egypt. On 8 August 2005, $750 million of bonds due on 15 September 2015 were issued under the US shelf programme and on 8 September 2005, Â£350 million of bonds due on 8 September 2014 were issued under the Medium Term Note programme. Following the acquisition of MobiFon S.A. ('MobiFon') and its parent company, MobiFon Holdings B.V., from Telesystem International Wireless Inc. ('TIW') of Canada on 31 May 2005, the Group acquired additional capital market debt with a nominal value of $223 million. Under a tender offer, which expired on 6 July 2005, MobiFon Holdings B.V. repurchased and cancelled bonds with a nominal value of $16 million for consideration of $20 million, which included $1 million of accrued interest. As a result of the acquisition of Oskar Mobil a.s, from TIW on 31 May 2005, the Group acquired additional capital market debt with a nominal value of â‚¬325 million and drawn credit facilities of CZK3.6 billion and â‚¬22 million. The bonds were redeemed on 7 and 8 July 2005 for a total consideration of â‚¬378 million, including accrued interest of â‚¬6 million. Credit facilities of â‚¬141 million were repaid and cancelled on 30 June 2005. On 19 April 2005, the Board of directors of Vodafone Italy approved a proposal to buy back issued and outstanding shares for approximately â‚¬7.9 billion (Â£5.4 billion), which was subsequently approved by the shareholders of Vodafone Italy. The buy back took place in two tranches, the first occurred on 24 June 2005 and the second on 7 November 2005. As a result, Vodafone received â‚¬6.1 billion (Â£4.2 billion) and Verizon Communications Inc. received â‚¬1.8 billion (Â£1.2 billion). After the transaction, Vodafone and Verizon Communications Inc. shareholdings in Vodafone Italy remained at approximately 77% and 23%, respectively. SIGNIFICANT TRANSACTIONS The Group invested a net Â£1,887 million(1) in acquisition and disposal activities, including the purchase and disposal of investments, in the six months to 30 September 2005 and an analysis of the significant transactions and the increases to the Group's effective interest in the entities is shown below: Â£m Acquisitions(1): Czech Republic (nil to 99.9%) and Romania (20.1% to approximately 100%) 1,840 Other acquisitions, including investments 48 Disposals: Other disposals, including investments (1) ---------- 1,887 ========== (1) Figure is shown net of cash and cash equivalents acquired of Â£70 million On 31 May 2005, the Group acquired approximately 79.0% of the share capital of MobiFon S.A. in Romania, increasing the Group's ownership of MobiFon to approximately 99.1%. At the same time, the Group also acquired 99.9% of the issued share capital of Oskar Mobil a.s. in the Czech Republic for a cash consideration of approximately $3.5 billion (Â£1.9 billion) satisfied from the Group's cash resources. In addition, Vodafone assumed approximately $0.9 billion (Â£0.5 billion) of net debt. The remaining 0.9% of MobiFon was acquired in a separate transaction in the period. Details of transactions announced after 30 September 2005 are provided on page 44. This information is provided by RNS The company news service from the London Stock Exchange

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