Vodafone 2009 Annual Report Download - page 40

38 Vodafone Group Plc Annual Report 2009
The following discussion of principal risk factors and uncertainties identies the most signicant risks that may
adversely affect the Group’s business, operations, liquidity, nancial position or future performance. This section
should be carefully read in conjunction with the “Forward-looking statements” on page 142 of this document.
The focus of competition in many of the Group’s markets continues to shift
from customer acquisition to customer retention as the market for mobile
telecommunications has become increasingly penetrated. Customer deactivations
are measured by the Group’s churn rate. There can be no assurance that the Group
will not experience increases in churn rates, particularly as competition intensifies.
An increase in churn rates could adversely affect profitability because the Group
would experience lower revenue and additional selling costs to replace customers
or recapture lost revenue.
Increased competition has also led to declines in the prices the Group charges for its
mobile services and is expected to lead to further price declines in the future.
Competition could also lead to an increase in the level at which the Group must
provide subsidies for handsets. Additionally, the Group could face increased
competition should there be an award of additional licences in jurisdictions in which
a member of the Group already has a licence.
Delays in the development of handsets and network compatibility and
components may hinder the deployment of new technologies.
The Group’s operations depend in part upon the successful deployment of
continuously evolving telecommunications technologies. The Group uses
technologies from a number of vendors and makes significant capital expenditures
in connection with the deployment of such technologies. There can be no assurance
that common standards and specifications will be achieved, that there will be inter-
operability across Group and other networks, that technologies will be developed
according to anticipated schedules, that they will perform according to expectations
or that they will achieve commercial acceptance. The introduction of software and
other network components may also be delayed. The failure of vendor performance
or technology performance to meet the Group’s expectations or the failure of a
technology to achieve commercial acceptance could result in additional capital
expenditures by the Group or a reduction in profitability.
The Group may experience a decline in revenue or profitability
notwithstanding its efforts to increase revenue from the introduction
of new services.
As part of its strategy, the Group will continue to offer new services to its existing
customers and seek to increase non-voice service revenue as a percentage of total
service revenue. However, the Group may not be able to introduce these new services
commercially, or may experience significant delays due to problems such as the
availability of new mobile handsets, higher than anticipated prices of new handsets
or availability of new content services. In addition, even if these services are
introduced in accordance with expected time schedules, there is no assurance that
revenue from such services will increase ARPU or maintain profit margins.
Expected benefits from cost reduction initiatives may not be realised.
The Group has entered into several cost reduction initiatives principally relating to
network sharing, the outsourcing of IT application, development and maintenance,
data centre consolidation, supply chain management and a business transformation
programme to implement a single, integrated operating model using one ERP
system. However, there is no assurance that the full extent of the anticipated benefits
will be realised in the timeline envisaged.
Changes in assumptions underlying the carrying value of certain Group
assets could result in impairment.
Vodafone completes a review of the carrying value of its assets annually, or more
frequently where the circumstances require, to assess whether those carrying values
can be supported by the net present value of future cash flows derived from such
assets. This review examines the continued appropriateness of the assumptions in
respect of highly uncertain matters upon which the carrying values of certain of the
Group’s assets are based. This includes an assessment of discount rates and long term
growth rates, future technological developments and timing and quantum of future
capital expenditure, as well as several factors which may affect revenue and
Adverse macro economic conditions in the markets in which the Group
operates could impact the Group’s results of operations.
Adverse macro economic conditions and further deterioration in the global economic
environment, such as a deepening recession or further economic slowdown in the
markets in which the Group operates, may lead to a reduction in the level of demand
from the Group’s customers for existing and new products and services. In difficult
economic conditions, consumers may seek to reduce discretionary spending by
reducing their use of the Group’s products and services, including data services, or
by switching to lower-cost alternatives offered by the Group’s competitors. Similarly,
under these conditions the enterprise customers that the Group serves may delay
purchasing decisions, delay full implementation of service offerings or reduce their
use of the Group’s services. In addition, adverse economic conditions may lead to an
increased number of the Group’s consumer and enterprise customers that are unable
to pay for existing or additional services. If these events were to occur, it could have
a material adverse effect on the Group’s results of operations.
The continued volatility of worldwide financial markets may make it more
difficult for the Group to raise capital externally, which could have a
negative impact on the Group’s access to finance.
The Group’s key sources of liquidity in the foreseeable future are likely to be cash
generated from operations and borrowings through long term and short term
issuances in the capital markets as well as committed bank facilities. Due to the
recent volatility experienced in capital and credit markets around the world, new
issuances of debt securities may experience decreased demand. Adverse changes
in credit markets or Vodafone’s credit ratings could increase the cost of borrowing
and banks may be unwilling to renew credit facilities on existing terms. Any of these
factors could have a negative impact on the Group’s access to finance.
Regulatory decisions and changes in the regulatory environment could
adversely affect the Group’s business.
As the Group has ventures in a large number of geographic areas, it must comply with
an extensive range of requirements that regulate and supervise the licensing,
construction and operation of its telecommunications networks and services. In
particular, there are agencies which regulate and supervise the allocation of
frequency spectrum and which monitor and enforce regulation and competition
laws which apply to the mobile telecommunications industry. Decisions by regulators
regarding the granting, amendment or renewal of licences, to the Group or to third
parties, could adversely affect the Group’s future operations in these geographic
areas. The Group cannot provide any assurances that governments in the countries
in which it operates will not issue telecommunications licences to new operators
whose services will compete with it. In addition, other changes in the regulatory
environment concerning the use of mobile phones may lead to a reduction in the
usage of mobile phones or otherwise adversely affect the Group. Additionally,
decisions by regulators and new legislation, such as those relating to international
roaming charges and call termination rates, could affect the pricing for, or adversely
affect the revenue from, the services the Group offers. Further details on the
regulatory framework in certain countries and regions in which the Group operates,
and on regulatory proceedings can be found in “Regulation” on page 135.
Increased competition may reduce market share and revenue.
The Group faces intensifying competition and its ability to compete effectively will
depend on, among other things, network quality, capacity and coverage, the pricing
of services and equipment, the quality of customer service, development of new and
enhanced products and services, the reach and quality of sales and distribution
channels and capital resources. Competition could lead to a reduction in the rate at
which the Group adds new customers, a decrease in the size of the Group’s market
share and a decline in the Group’s ARPU as customers choose to receive
telecommunications services, or other competing services, from other providers.
Examples include, but are not limited to, competition from internet based services
and MVNOs.
Principal risk factors and uncertainties