# Vodafone Group organic service revenue impacted by COVID-19

- Link: https://www.directorstalkinterviews.com/vodafone-group-organic-service-revenue-impacted-by-covid-19/412845051
- Published: 2020-07-24T07:17:31+01:00
- Author: Amilia Stone

**[Vodafone Group Plc](https://www.directorstalkinterviews.com/ftse-company/vodafone-group/vod.l)**(
[LON:VOD](https://www.directorstalkinterviews.com/ftse-company/vodafone-group/vod.l))
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 summary** | **Q1 FY21
€m 
 | Q1 FY20
€m
 | Reported growth | Organic _growth^(1)_ | 
| Service revenue^(1) |   |   |   |   | 
| Total Europe | 7,227 | 6,782 | 6.6% | (2.6)% | 
|  – of which Germany | 2,840 | 2,265 | 25.4% | 0.0% | 
| Vodacom | 950 | 1,078 | (11.9)% | 1.5% | 
| Other Markets | 840 | 1,036 | (18.9)% | 9.1% | 
| Other / Eliminations | 93 | 98 |   |   | 
| Total service revenue | 9,110 | 8,994 | 1.3% | (1.3)% | 
| Other revenue | 1,396 | 1,659 |   |   | 
| Total revenue | 10,506 | 10,653 | (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 |   | Units | Q1 FY21 | Q1 FY20 | 
| Europe mobile contract customers^(1) |   | million | 64.5 | 63.3 | 
| Europe broadband customers^(1) |   | million | 25.2 | 18.8 | 
| Europe Consumer converged customers^(1) |   | million | 7.3 | 6.8 | 
| Europe mobile contract customer churn |   | % | 11.4 | 14.6 | 
| Africa data users^(2) |   | million | 82.1 | 79.1 | 
| M-Pesa transaction volume |   | billion | 5.0 | 3.0 | 
| Europe digital channel sales mix |   | % | 26 | 20 | 
| Average Europe monthly mobile data usage per customer |   | GB | 5.9 | 3.9 | 
| Europe on-net NGN broadband penetration^(1) |   | % | 30 | 28 |

_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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