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Vodafone Group

Vodafone Group organic service revenue impacted by COVID-19

Vodafone Group Plc (LON:VOD) has issued its Q1 FY21 trading update.

Maintaining commercial momentum during lockdown, service revenue in line with our expectations

·   Q1 organic service revenue relatively resilient with a decline of 1.3%*, mainly due to COVID-19 impacts

·   Resilient performance in Germany with stable organic service revenue growth

·  Mobile contract customer loyalty improved year-on-year for a seventh successive quarter and record 429,000 NGN broadband customer additions in Europe

·   Europe’s leading tower infrastructure company, ‘Vantage Towers’, on track for IPO in early 2021

Q1 performance summaryQ1 FY21
€m 
Q1 FY20
€m
Reported growthOrganic growth1
Service revenue1    
Total Europe7,2276,7826.6%(2.6)%
 – of which Germany2,8402,26525.4%0.0%
Vodacom9501,078(11.9)%1.5%
Other Markets8401,036(18.9)%9.1%
Other / Eliminations9398  
Total service revenue9,1108,9941.3%(1.3)%
Other revenue1,3961,659  
Total revenue10,50610,653(1.4)%(2.8)%

1.  Service revenue and organic growth are alternative performance measures. See page 7 for further details.

·   COVID-19 impacted sequential organic service revenue growth due to lower revenue from roaming and visitors, project delays and lower automotive activity in Business, and lower prepaid revenue in some smaller markets

·   On track to deliver at least €0.4 billion net opex reduction in Europe in FY21. Adjusted EBITDA outlook unchanged – remains ‘flat to slightly down’

·   FY21 guidance for ‘at least’ €5.0 billion of free cash flow (pre-spectrum) reiterated

Nick Read, Group Chief Executive, commented:

“Our trading performance in the first quarter demonstrates the relative resilience of our operating model and focused delivery of our strategic priorities. Whilst we have seen the direct impact on our revenue from travel restrictions and business project delays, we have also seen increased usage in voice and data, alongside record NGN broadband customer net additions in Europe.

I am also delighted to introduce Vantage Towers as Europe’s leading tower infrastructure company. A year ago, I set out a three-phase plan for our towers to deliver industrial synergies from network infrastructure sharing, generate operational efficiencies by establishing a dedicated towers management team, and unlock value for our shareholders through the IPO of Vantage Towers, which is firmly on track for early 2021.

The role Vodafone plays in society has never been more important, particularly as the markets in which we operate continue to face challenging conditions. We have executed well in delivering on our social contract to provide fast and reliable connectivity for our customers. We will continue to work collaboratively with governments and policy makers to create the right environment for investment in essential services and ensure our customers receive the best overall experience.”            

Operating review ⫶ Maintaining commercial momentum during lockdown

During the quarter, we made good progress against our four strategic priorities to deepen engagement with our customers, transform our operating model through targeted deployment of technology, improve the utilisation of our assets, and optimise our portfolio.

In Consumer, we are competing effectively across all market segments, with unlimited data at the high end and second brands in the value segment. We have reduced our reliance on above-the-line marketing, instead using a range of digital tools to drive ARPU accretion and greater customer engagement. The MyVodafone app has helped us stay connected with our customers during the lockdown, enabling them to top-up, upgrade and receive help from our virtual assistant Tobi. We have used the app as a platform to educate our customers and support their transition to our digital platforms.

In Business, we have developed a new range of propositions to support our customers in the more complex working environment and to meet the rising demand of SMEs. For example, we have developed solutions that enable virtual customer contact centres to be established in less than a week and announced a strategic relationship with Accenture to deliver managed enterprise-grade cybersecurity services to SMEs and national corporate customers in Europe.

Operational metrics UnitsQ1 FY21Q1 FY20
Europe mobile contract customers1 million64.563.3
Europe broadband customers1 million25.218.8
Europe Consumer converged customers1 million7.36.8
Europe mobile contract customer churn %11.414.6
Africa data users2 million82.179.1
M-Pesa transaction volume billion5.03.0
Europe digital channel sales mix %2620
Average Europe monthly mobile data usage per customer GB5.93.9
Europe on-net NGN broadband penetration1 %3028

1.    Including VodafoneZiggo | 2. Africa including Safaricom, Ghana and Egypt

Social contract ⫶ Responding to COVID-19 and supporting governments’ digital agenda

COVID-19 ⫶ Our five-point plan to support economic recovery

At the start of the COVID-19 crisis we outlined our rapid, comprehensive and co-ordinated five-point plan to support society and help save lives. Our priorities were to maintain the quality of our networks, support essential services, and keep people working, communicating, and able to access education and essential information. Through our essential network infrastructure, we have kept people and societies connected. We have donated over €100 million to support those affected by the crisis through direct contributions and services in-kind. The Vodafone Foundation has also donated €9.5 million to local charities in our markets in the form of cash grants, gifts in-kind and from colleague donations via the community fund.

As we look at the challenging economic period ahead, just as we were there for the emergency response phase, we are committed to playing a key role in supporting Europe’s economic and social recovery. As a result, we have evolved our five-point plan and identified five key areas where Vodafone can clearly prioritise activity and support governments’ digital agenda. These are:

·   expand and future-proof our network infrastructure with next-generation fixed line and mobile technologies;

·   further support governments as they seek to integrate eHealth and eEducation solutions into their “new normal” public service frameworks;

·   enhance digital access for the most vulnerable and support digital literacy;

·   promote the widespread adoption of digital technologies for all businesses, with a particular emphasis on SMEs; and

·   support government exit strategies through targeted deployment of digital technology.

Vodafone is ready to do everything in its power to support the recovery, whilst emerging a stronger business, playing an ever more critical role in society. In our African markets, we have deployed the same five-point plan approach, but are also prioritising furthering financial inclusion.

Social contract ⫶ Supporting governments’ digital agenda to drive sustainable industry change

During the next phase of the COVID-19 crisis we will support governments’ digital priorities, helping rebuild national economies and driving sustainable industry change. However, we will not be able to do this alone. We will need a more comprehensive and ambitious digital agenda to support societies’ recovery and resilience in the future.

Governments and regulators will need to support us – as an industry – with measures that promote a healthy, sustainable market structure, that support investment and enable us to make a fair return on capital employed.

We will continue to work hard on this shared ambition of a more resilient, sustainable, inclusive and digital Europe and are ready to partner with national governments, regulators and institutions to deliver this. As part of this ambition, we have announced that our Europe network will be powered by 100% renewable electricity no later than July 2021.

Vantage Towers ⫶ Europe’s leading tower infrastructure company with IPO on track for early 2021

In July 2019, Vodafone set out its three-phase plan for its tower assets:

·   to deliver industrial synergies through establishing network infrastructure sharing agreements;

·   to generate operational efficiencies by establishing a dedicated management team; and

·   to unlock value for Vodafone shareholders through the IPO of Vantage Towers.

Over the past year we have executed at pace, delivering network sharing agreements, forming ‘Vantage Towers’, and realising value for shareholders through the mergers of tower assets. We merged our Italy tower assets with INWIT in March 2020 and today announced the merger of our Greek tower assets with Wind.

We have also made further progress as we prepare for the IPO of our European TowerCo, ‘Vantage Towers’, based in Dusseldorf, Germany and we target an IPO in Frankfurt, Germany in early calendar 2021.

Further information on the formation, composition and pro forma financial information for Vantage Towers is provided in a separate announcement available here: investors.vodafone.com. We will continue to develop Vantage Towers’ strategy in the coming months, including its capital structure. Further details will be provided in due course.

Performance review ⫶ Trading in line with our expectations

·   Good commercial performance in most markets, service revenue impacted by roaming and visitor declines

·   Limited COVID-19 impact on Germany performance, reflecting resilient revenue mix

·   On track to deliver at least €0.4 billion net opex reduction in Europe in FY21. Adjusted EBITDA outlook unchanged – remains ‘flat to slightly down’

·   FY21 guidance for ‘at least’ €5.0 billion of free cash flow (pre-spectrum) reiterated

COVID-19 ⫶ Driving service revenue slowdown

The COVID-19 crisis had a significant impact on service revenue growth in Q1. Service revenue decreased by 1.3%* (Q4: +1.6%*), reflecting a:

·   1.6 percentage point sequential drag from lower roaming and visitor revenue, including the impact of lower prepaid SIM sales to tourists and migrant workers. During the quarter roaming and visitor revenue in Europe declined by around 70%;

·   0.5 percentage point sequential drag from lower Business revenue, predominately reflecting COVID-19 impacts including corporate project delays, notably in the UK, Spain, Italy and Ireland, as well as lower automotive IoT activity in Europe, partially offset by higher connectivity revenue with many of our customers’ employees working from home; and

·   0.8 percentage point sequential drag from other impacts. Increased voice revenue during the lockdown was more than offset by a drop in out-of-bundle prepaid traffic, prepaid top-up access challenges in some of our smaller markets, the zero rating of M-Pesa person-to-person transfers in some of Vodacom’s International operations, and increased competitive pressure in Greece and Ireland.

Germany ⫶ Resilient performance with good underlying momentum

Service revenue was flat* (Q4: -0.1%*), supported by the first-time inclusion of Unitymedia in our organic growth rate in Q1. Including Unitymedia, our service revenue growth slowed by 0.5 percentage points quarter-on-quarter. A 1.0 percentage point sequential drag from lower roaming and visitor revenue was offset by higher variable usage revenue during the COVID-19 lockdown and the lapping of international call rate regulation. Retail service revenue grew by 0.4%* (Q4: +0.9%*).

Fixed service revenue grew by 2.4%* (Q4: +2.2%)* supported by customer base growth and increased demand for high-speed broadband products. We added 74,000 cable customers in Q1, including 38,000 migrations from DSL. Our broadband customer base reached 10.8 million and 1.8 million customers subscribe to speeds of at least 400Mbps, with 19.5 million customers now able to access Gigabit speeds on our cable network. Our TV customer base declined by 50,000 (Q4: -61,000) reflecting lower retail activity during the COVID-19 crisis as well as lower wholesale customer losses. In August, we will launch a harmonised offering across all of our 24 million cable homes passed in Germany, bringing the superior Vodafone TV portfolio to the Unitymedia footprint. We increased our converged consumer customer base by 22,000 and have over 1.5 million converged accounts.

Mobile service revenue fell by 3.0%* (Q4: -1.9%*) as a decline in roaming, visitor and wholesale revenue was partially offset by higher incoming revenue and the lapping of international call rate regulation. We added 57,000 contract customers, supported by the migration of 63,000 Unitymedia mobile customers to our network. Contract churn reduced by 0.3 percentage points to 12.0%. We added 89,000 prepaid customers, supported by our new online-only proposition ‘CallYa Digital’.

We have continued to make rapid progress on integrating Unitymedia and we reached agreement on restructuring with the works councils in June. We remain on track to deliver our targeted synergies.

Italy, UK, Spain and Other Europe ⫶ Greater COVID impacts, solid commercial performance

Italy

Service revenue fell by 6.5%* (Q4: -3.7%*) reflecting a 2.0 percentage point sequential impact from lower roaming/visitor revenue, and lower Business revenue, primarily due to project delays.

Despite the challenging competitive environment, mobile number portability remained neutral, supported by lower prepaid churn at 24.4% (Q4: 27.4%) and our market-leading consumer mobile net promoter scores. Our second brand ‘ho.’ continued to grow strongly, reaching 2.0 million active customers at the end of the quarter. We maintained our good momentum in fixed broadband with 45,000 (Q4: 31,000) customer additions.

UK

Service revenue decreased by 1.9%* (Q4: +1.2%*) reflecting a 1.7 percentage point sequential drag from lower roaming/visitor revenue, lower incoming revenue, and lower Business revenue due to project delays, partially offset by customer base growth.

Our mobile contract customer base increased by 61,000 (Q4: 51,000) driven by increased business demand and all-time low mobile contract churn of 11.4% (Q4: 14.2%). Our broadband commercial momentum remained strong with 74,000 (Q4: 64,000) net customer additions, supported by our ‘Great British Broadband Switch’ campaign.

Spain

Service revenue declined by 6.9%* (Q4: -2.7%*) reflecting a 2.1 percentage point sequential drag from lower roaming/visitor revenue, service suspensions in Business and enriched customer offers such as unlimited data to SoHo/SME customers.

Mobile contract churn improved to 10.6% (Q4: 19.7%) reflecting limits on mobile number portability imposed by the government during the state of emergency. We are competing effectively across all segments of the market and grew our contract mobile, NGN broadband and TV customer base for a fourth consecutive quarter, supported by our second brand ‘Lowi’ which now has 1.0 million customers.

Other Europe

Service revenue declined by 3.1%* (Q4: +3.4%*) reflecting a 2.5 percentage point sequential drag from lower roaming/visitor revenue, and lower prepaid top-ups notably in Portugal and Greece, the first time inclusion of UPC, increased competition in Ireland and Greece, and the lapping of a prior year price increase in Romania.

In Portugal, service revenue grew by 0.7%* (Q4: +7.5%*) reflecting lower roaming/visitor revenue and lower prepaid revenue. In Ireland, service revenue fell by 6.8%* (Q4: -3.6%*) due to lower roaming/visitor revenue and increased competitive intensity. Service revenue in Greece declined by 8.8%* (Q4: +1.9%*) reflecting lower roaming/visitor revenue and increased competitive intensity.

Vodacom ⫶ Strong growth in data usage despite challenging macroeconomic environment

Vodacom service revenue grew by 1.5%* (Q4: +3.2%*) as higher usage revenue in South Africa was partially offset by challenging macroeconomic conditions and zero rating of some M-Pesa services in Vodacom’s International operations.

In South Africa, service revenue increased by 6.4%* (Q4: +3.7%*) supported by positive price elasticity and increased voice and data usage during the COVID-19 lockdown. In Vodacom’s International operations, service revenue fell by 5.2%* (Q4: +4.4%*) driven by lower economic activity, the zero-rating of person-to-person M-Pesa transfers in DRC, Mozambique and Lesotho, and government customer registration requirements in Tanzania.

In South Africa, we added 12,000 contract customer, but lost 2.6 million (Q4: -3.1 million) prepaid customers as we focused on customer lifetime value.

Other Markets

Service revenue in Other Markets grew by 9.1%* (Q4: +14.2%*). Service revenue in Turkey grew by 13.8%* (Q4: +16.0%*), reflecting a 2.8 percentage point sequential impact from lower roaming/visitor revenue, lower prepaid revenue, partially offset by higher fixed and wholesale revenue. Service revenue in Egypt grew by 6.0%* (Q4: +14.8%*), reflecting a 2.0 percentage point sequential impact from lower roaming/visitor revenue, and lower prepaid revenue growth due to lower variable usage during the pandemic curfew and lower prepaid SIM sales to visitors.

Alternative performance measures

In the discussion of the Group’s reported operating results, alternative performance measures are presented to provide readers with additional financial information that is regularly reviewed by management. However, this additional information presented is not uniformly defined by all companies including those in the Group’s industry. Accordingly, it may not be comparable with similarly titled measures and disclosures by other companies. Additionally, certain information presented is derived from amounts calculated in accordance with IFRS but is not itself an expressly permitted GAAP measure. Such measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure.

Service revenue

Service revenue comprises all revenue related to the provision of ongoing services including, but not limited to, monthly access charges, airtime usage, roaming, incoming and outgoing network usage by non-Vodafone customers and interconnect charges for incoming calls. We believe that it is both useful and necessary to report this measure for the following reasons:

·   It is used for internal performance reporting;

·   It is used in setting director and management remuneration; and

·   It is useful in connection with discussion with the investment community.

Organic growth

All amounts in this document marked with an “*” represent organic growth, which presents performance on a comparable basis in terms of merger and acquisition activity and movements in foreign exchange rates.   

Whilst this measure is not intended to be a substitute for reported growth, nor is it superior to reported growth, we believe that the measure provides useful and necessary information to investors and other interested parties for the following reasons:

·   It provides additional information on underlying growth of the business without the effect of certain factors unrelated to its operating performance;

·   It is used for internal performance analysis; and

·   It facilitates comparability of underlying growth with other companies (although the term “organic” is not a defined term under IFRS and may not, therefore, be comparable with similarly titled measures reported by other companies).

We have not provided a comparative in respect of organic growth rates as the current rates describe the change between the beginning and end of the current period, with such changes being explained by the commentary in this news release. If comparatives were provided, significant sections of the commentary from the news release for prior periods would also need to be included, reducing the usefulness and transparency of this document

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