Vodafone Group Plc

Vodafone Group PlcQ3 2018 Trading Updateslightly weaker contribution, primarily due to the UK, as I will describe later. So, all together, the underlyingcore business drivers – the green bars – contributed around 3% of growth.Then, on the right of this chart, you can see the drags from regulation, handset financing, carrier servicesand also our strategic choices in containing wholesale revenues, which have increased compared to lastyear, reducing our growth by almost two percentage points to the 1.1% level which you see in the last barand I commented earlier. Now, clearly, over time, some of the drags will remain but, in aggregate, theyshould reduce.Now, let me walk you through the progress on each of the growth drivers in detail in the next three pages.On page 7, you can see a summary of our initiatives to monetise mobile data. As you can see on the left,data traffic in Europe and AMAP continues to grow strongly, up 61% in the quarter. This was driven mainlyby higher average smartphone usage, which is now 2.2GB per month in Europe, which is a rise of nearly50% year on year. We are monetising this growth through more-for-more strategies, using a variety ofdifferent approaches, which we show on the right part of the page.Spain, for example, is a good case of classic more-for-more approach. This week, we have announced a 4price increase on our most popular convergent bundles, giving, in exchange, an additional basic mobile lineand a Social Pass, integrating, therefore, the pass into our core offering. This underpins our confidence thatour leading competitors will not remain excessively promotional, despite the more intense quarter we havejust seen, which Nick will comment more about later.We also continue to use the Pass on a standalone basis, especially in markets where data-bundle sizes aremore modest. In Egypt, the recent introduction of hourly Passes attracted 570,000 users for an additionaltwo Egyptian pounds per hour, boosting the number of active users by 7%.Segmentation is another powerful way to boost data value. In Portugal, our youth proposition, leveraging onthe successful Shake gamification engine – this is something that was developed in Italy and we coveredalready in the past – has had good results, driving a 9% increase in top-ups for these customers.And last but certainly not least is the huge opportunity presented by advanced data analytics and big data topersonalise offers to the customers. We have many examples: here, South Africa – we talked a lot alreadyin the past – is arguably the most successful so far, with the Just4You campaign, with almost tripled databundle sales in Q3 helping to offset the drag from the lowering of the out-of-bundle data rates.On slide 8, you can see the benefit from these various initiatives to consumer contract ARPU, which issupported on an underlying basis, thanks to more-for-more price moves and larger data allowances. In thechart on the left part, we show the ARPU on a reported basis, which, in general, is declining, and then thesame adjusted for regulation, handset financing and the large negative mix effect from the shift from lowerprice SIM-only bundles, which are now 30% of the base in Germany and the UK, and up around fivepercentage points on last year.Once you do this adjustment, you can see that Germany is, in fact, growing, primarily thanks to the more-formore initiatives in new customers in April ’16 and in April ‘17, together with our focus on more profitabledirect channels. However, DT did not change its prices following our most recent more-for-more initiative toincrease the offers by 3 in October, so we had to introduce a three-month-free promo in the quarter. InItaly, our prepaid ARPU continued to develop positively, reflecting the success of our new above-the-linesegmented offers in the quarter, as well as the success of our targeted efforts to lock in higher-spendingcustomers with more generous data bundles. However, the BTL market remains intense and the newentrant is expected to launch in the coming months. UK: UK customer ARPU is growing as well on anunderlying basis, thanks to more-for-more, a better inflow mix of higher-value customers and inflation-linkedcustomer-price increases. And finally, in Spain, the benefits of our refresh moves of last April were offset inthe quarter by intense promotional activity from leading competitors, resulting in a slight ARPU decline. So,Spain is the only one on the slide that you see on the right part is negative.So, overall, I would say that Q3 has been a slightly more promotional quarter with a clear industry trendtowards larger data allowances, but given our differentiated network quality and the opportunities fromdeploying advanced data analytics, we continue to see opportunities for monetisation, depending, of course,on the behaviour of the top-quality providers in the market.1 February 20183

Vodafone Group PlcQ3 2018 Trading UpdateMoving to slide 9, here we are pleased with our progress in Fixed, where our capital-smart infrastructurestrategy, which you can see indicated on the right, continues to deliver strong results, as you have alreadyheard. Fixed now represents 29% of our European revenues. The chart highlights our fixed scale in eachcountry, and some key recent developments in our build activity as well as our strategic partnerships.Starting with the UK, we are delighted that CityFibre has recently announced that Milton Keynes will be thefirst city where it builds out FTTH. The next 11 cities will be announced during the coming year as part of ourcommercial agreement to support the buildout to one million homes, and then we have the option to extendto five million homes in the future. In Germany, we are scaling up the initiatives behind the 2 billion Gigabitinvestment plan to reach business parks and rural homes and also upgrade cable. We have alreadysuccessfully piloted the switch-off analogue services to support the upgrade of our cable infrastructure toDOCSIS 3.1, and we are in active negotiations with a number of municipalities and business parks.In Italy, Open Fiber continues to progress. As of the end of December, Open Fiber had passed 2.4 millionhomes, of which 1.9 are now marketable. And while the number of homes passed grew by 400,000 in thequarter, the number of homes marketable increased by only 150,000. This is because Open Fiber hasbegun expanding into the 81 new cities in addition to the original 13, and inevitably there is a time lagbetween building coverage and the point at which, for us, it is commercially efficient to open a city and startmarketing. And finally, in Portugal, we commenced the network-share build with NOS. So, our progress infixed creates the platform for us to drive convergence across our combined customer base, with just under200,000 converged customers added in the quarter.And finally, last slide for me, slide 10: Enterprise. As I said, it’s 29% of Group service revenue. In Q3, overallEnterprise service revenue increased by 40 basis points, which you can see in the third grey bar on the leftpart of the chart. Excluding the impact of the regulation, Enterprise grew 1.6% – this is the red bar. Thisperformance was impacted by a slowdown in the UK, which was as the result, essentially, of customer lossesduring previous quarters and some quarterly project phasing. The green bars exclude the more volatile UKperformance and highlight the positive ongoing momentum in Enterprise across the remainder of ourfootprint, with growth of over 3%. This reflects a combination of robust fixed and mobile growth and includesalso IoT, which is up almost 19%.On the right, you can see the story market by market. Germany is now back to growth, and Italy, Spain andSouth Africa are all performing well. In the UK, now our primary focus is improving the profitability of theformer Cable & Wireless assets by eliminating legacy networks and transforming our cost structure.So, now, Nick will comment on the different markets.Trading UpdateNick ReadGroup Chief Financial Officer, VodafoneThank you, Vittorio, and good morning, everybody. Turning to page 12, as Vittorio has already highlighted,we maintained our momentum in the third quarter, with similar reported service-revenue growth to Q2. Thechart on the left-hand side of the page shows that our underlying performance, excluding the drag from EUregulation and the impact of UK handset financing, was materially higher, at 2.3%, and again similar to priorquarters. In aggregate, these drags on our reported growth were broadly similar quarter over quarter, as thereduced drag from roaming post the peak summer quarter was offset by the growing impact of UK handsetfinancing. Note that our low-margin carrier business continued to drag on our year-on-year growth by around70 basis points, as was the case last quarter. This follows the implementation of a new traffic-optimisationengine, which has improved profitability.1 February 20184

Vodafone Group PlcQ3 2018 Trading UpdateThe chart on the right shows our growth by region. As you can see, Europe slowed, on both a reported andunderlying basis, by around 50 basis points. The decline in quarterly trends reflects the lapping of price risesin Italy and higher promotional intensity in Spain during Q3. Our underlying growth rate of around 2% reflectsstrong fixed growth of over 4% and mobile growth of around 1%. In AMAP, growth accelerated to 6.8% from6.2%, reflecting a broad-based improvement in Vodacom.Moving to slide 13, you can see a summary of the competitive environment and commercial performance ofour major European markets in the quarter. In Germany, the competitive landscape remained broadlystable. Our co-leading network quality continued to support good customer base growth, with 144,000mobile contract and 89,000 broadband net additions in the quarter. Reported service revenue growthimproved to 2.5% from 1.6% in Q2, reflecting lower regulatory drags from roaming and the lapping of theMTR cut last December. Ex-regulation, our underlying performance was a robust 3.4% growth. Lookingahead to Q4, we face tougher prior-year comparisons in wholesale, and we also begin to lap the inflection inpost-pay subscriber growth in Q4 last year. As a result, despite also lapping the remaining MTR drag, weexpect Q4 reported growth to moderate slightly compared to Q3.Turning to the UK, the competitive environment also remains stable. Our mobile recovery continued to gainmomentum, as much improved customer service and a record network performance led to another gain inNPS and 1.6% underlying mobile growth, up from 1% in Q2. Our commercial momentum was solid, with41,000 mobile contract net adds. While this was down year on year, importantly the quality of our customermix continues to improve. We also enjoyed our best ever quarter in UK broadband.This improvement in Consumer was offset by a decline in our fixed Enterprise business, which the result ofboth prior-year customer losses and project phasing, as Vittorio mentioned earlier. Together with anincreasing headwind from handset financing, which dragged on growth by 3.6% compared to 1.5% in theprior quarter, this led to a reported service revenue decline of 4.8% in the quarter. In Q4, we expect to seefurther underlying improvements in mobile, together with some reversal of the project-phasing impact infixed, which we experienced in Q3.In Italy, competition remains intense, with below-the-line promotional offers continuing. However, mobile netport volumes were stable year over year, following a significant step-up in prior quarters. In mobile, our newsegment propositions and personalised offers have helped to improve our sales mix and customer retention,resulting in lower prepaid losses, while, in fixed, we had another record quarter. The slowdown in servicerevenue growth compared to Q2 was expected, given the full lapping of mobile tariff changes from the prioryear.And finally, Spain: the high end of the market was extremely promotional in Q3, with significant discountingby all the major operators. This led to higher churn in both mobile and fixed during the quarter. Despite this,our commercial performance remained robust, with 30,000 mobile contract and 68,000 fixed broadbandcustomers added in Q3. Growth slowed to 2% as a result of promotions, as well as around a 100 basis pointdrag from lower visitor revenues quarter over quarter. Promotional activity in the higher-value segments onthe market ended in early January, and price rises have been announced by all the operators.Moving on to AMAP on slide 14, in general we saw a stable competitive environment. In South Africa, weare enjoying strong customer base growth. However, we have been working proactively to lower out-ofbundle data pricing – a key focus area for consumers and regulators – with rates reducing by up to 50% fromthe beginning of October. We aim to mitigate this impact through growing in-bundle usage, which wesucceeded in doing throughout the quarter, with data revenue growth in December back up 13%. Servicerevenue in Q3 improved by 100 basis points to 4.9%, largely reflecting the lapping of MTR cuts in the prioryear.In Vodacom’s international operations, we saw a healthy acceleration in service revenue growth to 10.4%,supported by growing data demand and M-Pesa. In Turkey and Egypt, our commercial momentumremained strong. Service revenue in Turkey grew by 13.8%, reflecting continued strong consumer contractbase growth and data usage, while, in Egypt, service revenue grew 18.8% following successful segmentedcampaigns and price increases.Turning to India on slide 15, the competitive and regulatory environment remains extremely intense, with themarket-leader increasing the competitiveness of its tariffs, despite price rises by the new entrant. This wasfurther exacerbated by a 57% MTR cut in October. Consequently, as you can see in the top left-hand chart,1 February 20185

Vodafone Group PlcQ3 2018 Trading Updateservice revenues declined 23.1% in Q3. Excluding the nine-percentage-point impact from the MTR cut,service revenue declined 14.2%, or 1.5% Q over Q.Commercially, as smaller players have exited the market, we have seized the opportunity to win share,adding 5.1 million customers in the quarter. And as the chart at the bottom illustrates, we have been able tolargely mitigate the impact of low revenues on EBITDA margin through effective cost control. We expectcompetitive pressures to increase in Q4, given the recent price cuts from Jio in response to Airtel, and thereis also a further two-percentage-point regulatory headwind from a cut to international termination rates.With this challenging context, the positive news is that we are making good progress on gaining thenecessary regulatory approvals for our merger with Idea, with the DoT now the last major step before we cancomplete the merger in the first half of the year. We have also taken steps to strengthen the proposed JV’sbalance sheet, having agreed the sale of the standalone towers and announced the combined cash injectioninto the merged company of up to 1.8 billion. And we continue to explore options very actively to monetiseboth the JV’s 11% stake and the Group’s 42% stake in Indus Towers.So, turning to slide 16, in summary, we have maintained this year’s good commercial momentum through thethird quarter and delivered similar revenue growth, with improvements at Vodacom mitigating some of theincreased promotional activity experienced in Europe. We also achieved further progress across our threestrategic growth engines: in mobile, our more-for-more proposition continue to meet our customers’ growingappetite for high-quality data and contributing to underlying ARPU growth; in fixed, we continued our strongmomentum and enjoyed our best-ever quarter of NGN net additions in Europe; and in Enterprise, ourperformance was robust, as we continued to grow, despite regulatory drags, aided by our leading IoTplatform and global footprint.In India, the competitive and regulatory environment remains very intense and we are making progress insecuring the approvals that are needed to create a pan-India, scaled player in a consolidated market.In terms of our financial outlook, we expect to maintain our momentum in the fourth quarter, which, alongwith good progress of our Fit for Growth programme, means that we are confident we will achieve ourguidance for the year.With that, I will hand back to the operator for Q&A. Given the relatively short period of time available, can Iask you to limit yourself to one question – I know that’s really hard to do – to ensure everyone gets anopportunity to speak.Questions and AnswersAkhil Dattani, JP MorganHi. Good morning. Thanks for taking the question. I just had a question on the service-revenue growthoutlook, please, and there’s two little bits to it. The first is just on Data monetisation. Vittorio, you mentionedthat, with the passes, you’re now evolving your thinking a bit in certain markets, now incorporating that in thetariff, so just keen to understand what you see on the ground that’s making you do that. Is it competitive-ledor is it a function of just changing your view?And the second: Nick mentioned the SIM-only effect, the handset-financing drags, so, clearly quite a fewfactors impacting your service-revenue outlook at the moment – or service-revenue trend, sorry. I guesswhat I’m trying to understand is, as we move to IFRS 15, how will that impact these distortions and how willthat impact the growth rates you report? Thanks.Vittorio ColaoThanks, Akhil. Definitely, the second question, I’ll leave it to Nick. On the first one, I think you said it. Thepasses have to be seen as part of our more-for-more strategy and, of course, they are impacted both bycompetitive dynamics but also by the type of offers that we have in different markets. So, it is clear that, in1 February 20186

Vodafone Group PlcQ3 2018 Trading Updatecertain markets, they are more standalone offers. In other markets, we have to include them – or we want toinclude them into our converged offers or we want to include it into our SIM-only offers.So, at the end of the day, a pass is another way to give worry-free usage in exchange for something, and thesomething is the underlying ARPU. I am, I would say, comforted from – there is one slide in my pack, theslide that says taking out the distortions, we see a pretty good net ARPU trend, with the exception of Spain,which was a bit promotional last quarter. So, they are part of an overall strategy to monetise data andincrease usage, and they can be used flexibly in each market – to some extent, in some markets, even to thehour they can be used. So, I hope I answered your question.Nick – IFRS 15?Nick ReadYes. Akhil, a slightly complex topic. What I would say broadly on ‘S 15’ [IFRS 15] is, because, when youbring in S 15, you’re effectively restating your previous year, you won’t see a dramatic impact. You might seea slight improvement on service-revenue growth, mainly because you don’t get the SIM-only drag effectmoving forward because of that restatement. So, I think it’s important: S 15 is like a restated methodologyand, therefore, when you’re looking at growth rates etc, not a big impact. I would say, at the moment,probably the most material impact we’re getting in our results on SIM-only is in Germany, and that’s justunder about three percentage points of drag, given that drive.Akhil DattaniThanks. Nick, can I just ask: going forward, do you think you’ll stick to service revenues under IFRS 15 or doyou think that would support a change to focus more on total?Nick ReadNo, I think we’ll still continue to have service revenue.Vittorio ColaoI personally think it’s healthy, Akhil, because, again, we need to look at stuff on which we make money. It’s alittle bit like Enterprise: the more complex project we have, like in the UK, the more we have hardware andequipment, the more hardware distorts the real number, like, for example, this quarter. So, for me, at theend of the day, I look at what generates cash flow, not at reported numbers. So, in that sense, it’s a positive.And SIM-only can be good: it’s not necessarily the fact that it looks like a lower number that we don’t like it.Nick ReadYes. And importantly, to Vittorio’s point, you get a higher correlation with your EBITDA.Vittorio ColaoYes, and cash and everything, so it’s good. It makes your life harder, but it’s good.Maurice Patrick, Barclays CapitalMorning, guys. It’s a question from me on spectrum, please. So, you have a number of spectrum auctionscoming up. Some, I think, are a combination of new licences and some are renewals; some 700 MHz,probably expensive; other high-frequency, 3.4 GHz. So, I suspect, in aggregate, the cost of spectrumprobably goes up by your historical 1.2 billion a year, but thoughts on that. But also, can you share with ushow you expect to see competitive bidding intensity across spectrum auctions in your key markets? You1 February 20187

Vodafone Group PlcQ3 2018 Trading Updatecould argue that demand is probably higher, given your strong data growth, but then there’s lots of spectrumcoming up, so maybe less. So, thoughts on competitive bidding. Thank you.Vittorio ColaoI’ll leave to Nick the answer about the spreading and how much the 1.2 billion is an average and how much,instead, we might have concentration in certain years.The second part of your question is intriguing because, traditionally, I would have said, ‘How can I answerthat?’ Auctions are auctions, and it’s always difficult to predict how they will go. The reality is in yourquestion: there is already an element of truth. We have more and more technology options. It’s more andmore possible to aggregate bands, to exploit traffic in different ways. We can shut down certain elements.So, my sense is that we will become more and more sophisticated over time, as long as we have, of course,the courage to make some decisions in terms of allocation of bands and use of bands. The actual result ofeach specific auction, in the end, will depend on how many people want to have the same band, but we willhave more flexibility in the future.Nick, on the financial impact of this?Nick ReadYes. Maurice, just to be comprehensive, in terms of our expectation over 2018-2019 in terms of what are theauctions coming up, we do have a large volume. So, 2018, we’re expecting UK 2.3 and 3.5; Germany, 2.1renewal and 3.5; Italy and Spain, 700 and 3.5. South Africa, at some point – I know I’ve been saying that forfive years – will come, hopefully, in 2018. And then, 2019, UK 700; and the Netherlands 700 and 2.1. So,you’re right to call out the fact that it is a heavier 18 months/two years ahead of us. What I would say,however, though, is I stressed at the September point the strength of our balance sheet, leveraged down at2.2 times, so we’ve

Vodafone, the Vodafone Speech Mark, the Vodafone Portrait, Vodacom, RED, Vodafone One Net, Vodafone . looks down sequentially and year over year, but primarily this reflects a post-pay to prepaid migration in Italy as a result of a new committed offer – prepaid – which is based, however, on credit-card . In Portugal, our youth .