Vodafone 2007 Annual Report Download - page 9

Vodafone Group Plc Annual Report 2007 7
Over 11 million customers now benefit from lower roaming pricing through
Vodafone Passport and our European customers are now benefiting from our
commitment to reduce roaming prices by 40% compared to summer 2005.
We expect roaming revenues to be lower year on year in 2008 due to the
combined effect of Vodafone’s own initiatives and direct regulatory
intervention.
During the year, we began implementing the core cost reduction programmes
we developed last year. We have successfully outsourced IT application
development and maintenance and we are well on track to deliver expected
unit cost savings of approximately 25% to 30% within two to four years. We
have also made faster than expected progress on data centre consolidation,
with anticipated savings of 25% to 30% in one to two years. Centralisation of
our network supply chain management was also completed in April 2007 and
is expected to reduce costs by around £250 million within one year.
In addition, we are seeking to reduce the longer term cost of ownership of our
networks through network sharing arrangements and have announced
initiatives in Spain and the UK.
While many of these cost initiatives are multi-year programmes that are
expected to deliver significant benefits over time, we are focused on realising
some early savings in the year ahead and, for Europe and common functions,
continue to target a 10% mobile capital expenditure to revenue ratio next
year, with broadly stable mobile operating expenses compared to the 2006
financial year.
Innovate and deliver on our customers’ total communications needs
There are several key initiatives underway in this area and we expect these to
begin to become more significant to the Group towards the end of next year.
As part of our drive to substitute fixed line usage with mobile, we have
launched several fixed location pricing plans offering customers fixed line
prices when they call from within or around their home or office. These
offerings target fixed to mobile substitution from home and office
environments and are proving popular with customers. Vodafone At Home
and Vodafone Office are currently available in seven markets for consumers
and twelve markets for businesses, with over three million and over two
million customers respectively.
Complementary to our high speed mobile broadband (HSDPA) offerings,
Vodafone is now offering fixed broadband services (DSL) in five markets. With the
exception of Arcor, our fixed line business in Germany, the provision of these
services to date has been on a resale basis. We will continue to develop our
approach for the provision and roll out of DSL services on a market by market
basis and in some cases may complement our resale approach by building or
acquiring our own infrastructure where the returns justify the investment.
We are also developing products and services to integrate the mobile and PC
environments by enhancing our Vodafone live! service and forming
partnerships with leading internet players. In the coming months, our
customers will be able to experience PC to mobile instant messaging with
Yahoo! and Microsoft, search with Google, auctions via eBay, videos through
YouTube and social networking with MySpace, all via their mobile.
Mobile advertising is also a potentially significant future revenue stream for
our business. We have signed agreements with Yahoo! in the UK and leading
providers in Germany and Italy to enter into this new business through
banner and content based advertising.
Deliver strong growth in emerging markets
Our focus is to build on our strong track record of creating value in emerging
markets. We have delivered further strong growth in our existing operations in
Egypt, Romania and South Africa. Our recent acquisition in Turkey has
performed ahead of our business plan at the time of the acquisition, with
strong revenue growth and better than expected profitability.
The acquisition of interests in Hutchison Essar accelerates Vodafone’s move
to a controlling position in a leading operator in India and significantly
increases our presence in emerging markets. With market penetration of
around 14% and with a population of over 1.1 billion, India provides a very
significant opportunity for future growth. We look forward to bringing
Vodafone’s products, services and brand to the Indian market.
Arun Sarin
Chief Executive
Actively manage our portfolio to maximise returns
Our strategy is to invest only where we can generate superior returns for our
shareholders. We look to invest in markets that offer a strong local position,
with a focus on specific regions, with any transactions subject to strict
financial investment criteria.
In line with this strategy, we executed a number of transactions during the
year. We sold our non-controlling interests in Belgium and Switzerland at
attractive valuations, with cash
proceeds of £1.3 billion and
£1.8 billion respectively. More
recently, we increased our
emerging markets presence with
an additional 4.8% interest in
Vodafone Egypt and gained control in India for £5.5 billion in May 2007.
We remain committed to our investment in Verizon Wireless in the US which
continues to deliver strong performances on all key metrics, with record
customer growth, due in part to a market leading low churn rate, and
continued success in driving the uptake of non-voice services.
Align capital structure and shareholder returns policy to strategy
In May 2006, we outlined a new capital structure and returns policy
consistent with the operational strategy of the business, resulting in a
targeted annual 60% payout of adjusted earnings per share in the form of
dividends.
We also moved to a higher level of gearing and, having returned over £19
billion to shareholders excluding dividends in the two previous financial years,
including a £9 billion one-off return in August 2006, we have no current plans
for further share purchases or one-time returns. The Board remains
committed to its existing policy of distributing 60% of adjusted earnings per
share by way of dividend. However, in recognition of the earnings dilution
arising from the Hutchison Essar acquisition, it has decided that it will target
modest increases in dividend per share in the near term until the payout ratio
returns to 60%.
Prospects for the year ahead
Our focus in the year ahead will be on improving price elasticity in Europe,
achieving more savings from our cost reduction programmes, delivering on
our total communications strategy and beginning to realise the very
significant growth opportunity in India.
We expect market conditions to remain challenging for the year ahead in
Europe, notwithstanding continued positive trends in data revenue and voice
usage. Overall growth prospects for the EMAPA region remain strong due to
increasing market penetration and they are further enhanced by the recent
acquisition in India.
Against this background, Group revenue is expected to be in the range of
£33.3 billion to £34.1 billion, with adjusted operating profit in the range of
£9.3 billion to £9.8 billion. Capital expenditure on fixed assets is anticipated to
be in the range of £4.7 billion to £5.1 billion, including in excess of £1.0
billion in India. Free cash flow is expected to be £4.0 billion to £4.5 billion,
after taking into account £0.6 billion of payments related to long standing tax
issues, a net cash outflow of £0.8 billion in respect of India and a £0.5 billion
outflow from items rolling over from 2007.
We have completed the first year under our new strategy and I am excited by
the start we have made. We have made good progress towards fulfilling our
total communications vision and this is a journey that we are all looking
forward to taking at Vodafone.
We are well placed to continue executing our strategy in the year ahead, to
deliver the core benefits of mobility to our customers and to generate
superior returns for our shareholders.
“India exposes us to one of
the fastest growing
communications markets
in the world”
Strategy