Interim Results - Part 1

15th Nov 2005 07:03

Vodafone Group Plc15 November 2005 VODAFONE GROUP PLCINTERIM RESULTS FOR THE SIX MONTHS ENDED30 SEPTEMBER 2005 ********PART I******** VODAFONE GROUP PLC Embargo: Not for publication before 07:00 hoursVODAFONE ANNOUNCES RESULTS FOR THE 15 November 2005SIX MONTHS TO 30 SEPTEMBER 2005 Robust financial performance: * Group revenue of £18.3 billion. Mobile telecommunications revenue increased to £17.7 billion, with organic growth(1) of 5.8% * Adjusted basic earnings per share(1) increased by 8.5% to 5.37 pence. Basic earnings per share were 4.36 pence. Profit before taxation for the period was £4.1 billion after an impairment charge of £0.5 billion * Free cash flow(1) of £3.7 billion. Net cash inflow from operating activities, after net taxation paid of £0.7 billion, up 4.4% to £6.1 billion Investment in customer growth: * Net organic proportionate additions of 10.0 million for the period * Closing proportionate customer base of 171.0 million, representing annualised organic growth of 12.9% Continuing strong take-up of products and services: * Total 3G devices of over 4.9 million at the period end, including 4.5 million consumer devices * Mobile voice usage increased by 17.0% to 95.6 billion minutes and non-messaging data revenue grew by 29.6% to £1 billion Substantial increase in returns to shareholders: * Interim dividend per share increased by 15%, to 2.20 pence, giving a pay-out of approximately £1.4 billion. Targeting a 50% dividend pay-out ratio for the year ending 31 March 2007 * Increasing share purchase target by £2 billion to £6.5 billion for the year to March 2006. Since 1 April, £3.4 billion has been expended, reducing shares in issue by 3.7% (1) See page 62 for definition of terms and page 61 for use of non-GAAP financial information. Arun Sarin, Chief Executive, commented: "I am pleased to announce another strong set of results. We have grown ourcustomer base to 171 million and made good progress on 3G and other globalproducts and services. We continue to outperform our competitors in most of ourmarkets as we leverage our global scale and remain focused on delivering ourstrategy for growth. The Board is pleased to announce a substantial increase inreturns to shareholders." Chief Executive's Statement Vodafone Group has posted another good set of results for the first half of thisfinancial year, underpinned by a strong operational performance. The main feature of the last six months has been the success our businesses haveenjoyed in acquiring and retaining customers. Our Group added 10 million net organic proportionate mobile customers in the first half, representingannualised growth of approximately 13%. The total proportionate customer base ofthe Group has risen to 171 million as we continue to enjoy success in both lowand high penetration markets. Our focus on customers can also be seen in the continued and accelerating growthof our 3G customer base. Our early push for 3G is delivering real benefits andwe now have approximately 5 million devices. Across the markets where we haveintroduced the benefits of W-CDMA, I continue to believe that 3G offersVodafone, and indeed the mobile industry, significant opportunities for growthin the future. We are now also seeing the benefits of scale introduced into the 3G world.Handset prices to Vodafone have reduced by around 30% in the last 12 months andcontinued improvements in functionality are all helping to deliver 3G as a massmarket proposition. The Vodafone 3G service offering also continues to develop,with a major push in both music and mobile TV which will be enhanced by therollout of HSDPA next year. I am excited about the prospects for these adjacentmarkets and our ability to drive new revenue streams. In light of our financial performance, we are reiterating our guidance rangesfor the full year. At this stage in the year we see the likely organicproportionate mobile revenue growth to be in the middle of the 6 to 9% range weindicated in May and organic proportionate mobile EBITDA margins to be at thelower end of the flat to minus 1% range. The key trends in our business are reflected through our major geographies.First, our core European footprint is delivering solid growth and broadly flatmargins. Given the competitive intensity of the European markets and ourcontinued push for new customers, including 3G customers which tend to have ahigher upfront subsidy and higher ARPUs, this is excellent progress. In Japan, execution of our turn-around is on track and I am pleased with theprogress we are making. One of the key aspects of this programme is that wecontinue to invest in customers. The EBITDA margin declined six percentagepoints year on year in the first half, which together with the effects of stakechanges a year ago, contributed the majority of the 1.5 percentage point fall inthe total mobile proportionate EBITDA margin. In the US, our associate, Verizon Wireless, continues to lead the market forcustomer additions. This has led to continued strong double digit servicerevenue growth, with some associated margin impact. Given the development of theUS market and market leading position enjoyed by Verizon Wireless, we aresupportive of this strategy. The Group continues to benefit from global scale. Our One Vodafoneimplementation is now ramping up to ensure we can deliver full benefits from the2008 financial year. The differentiated customer propositions we have introducedin the last 12 months are delivering value to our customers. A very good exampleof utilising our scale is the introduction of Vodafone Passport, which today isused by over 3 million customers across the Vodafone footprint. Shareholdersshould expect us to continue to leverage our unrivalled scale in the future. Inorganic growth is also a factor in our longer term development. This year wehave announced acquisitions in Romania, the Czech Republic, India and SouthAfrica as well as the disposal of our Swedish business. We will continue tofocus on selective acquisitions and these recent announcements highlight ourstrategy of investing in growth markets. The Board has approved a 15% increase in the interim dividend to 2.20 pence pershare. The Board has also indicated that it is targeting a 50% dividend pay-outratio to be achieved for the 2007 financial year. Having taken into account thetarget of a 50% pay-out, growth in future dividends is expected to be in line with underlying earnings growth. The Board has also approved a £6.5 billion share purchase programme target forthis financial year, representing an increase of £2 billion on the £4.5 billiontarget announced in May. The Board will continue to review the appropriateallocation of capital on an ongoing basis. Vodafone Group continues to prosper in a competitive and challengingenvironment. I am very satisfied with progress and believe that the Group isuniquely placed to take advantage of the many opportunities to delivershareholder value in the future. Arun Sarin GROUP FINANCIAL AND OPERATING HIGHLIGHTS Six months to 30 September 2005 2004 Change % ---------------------------- Page £m £m £ Organic----------------------------------------------------------------------------------------------------------------Financial information Revenue 18,251 16,742 9.0 6.4 Operating profit 4,477 4,759 (5.9) Profit before taxation 4,107 4,540 (9.5) Profit for the period 2,818 3,683 (23.5) Basic earnings per share (pence) 4.36p 5.40p (19.3) Capitalised fixed asset additions 2,097 2,177 (3.7) Net cash flow from operating activities 6,084 5,827 4.4 ---------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------Performance reporting(1) Group EBITDA 58 6,711 6,320 6.2 3.3 Adjusted operating profit 6 4,973 4,759 4.5 3.9 Adjusted profit before tax 20 4,753 4,524 5.1 Adjusted effective tax rate 20 30.4% 29.0% Adjusted profit for the period attributable to equity shareholders 39 3,421 3,309 3.4 Adjusted basic earnings per share (pence) 39 5.37p 4.95p 8.5 Free cash flow 23 3,695 4,019 (8.1) Net debt at 30 September 23 14,093 11,081 27.2 ---------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------Operational Vodafone live! - active devices (million)(2)(3)(4) 35.0 11.1 215.3 3G registered devices (million)(2)(3) 4.9 0.1 Vodafone Mobile Connect data card - registered devices (million)(2)(3) 0.6 0.3 100.0 Mobile voice usage (billion minutes)(2)(3) 95.6 81.7 17.0 Non-voice services as a % of service revenue(5) 18.8% 17.7% ---------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------The interim results have been prepared based on the requirements of theInternational Financial Reporting Standards ("IFRS") issued by the InternationalAccounting Standards Board ("IASB"). References to IFRS refer to the applicationof International Financial Reporting Standards, expected to be in issue andadopted for use in the European Union ("EU") for the next annual financialstatements, including International Accounting Standards ("IAS") andinterpretations issued by the IASB and its committees, and as interpreted by anyregulatory bodies applicable to the Group. Details of the principal accountingdifferences from UK generally accepted accounting practices are provided on page49 to 51. This results announcement contains certain information on the Group's resultsand cash flows that have been derived from amounts calculated in accordance withIFRS, but are not themselves IFRS measures. They should not be viewed inisolation as alternatives to the equivalent IFRS measure and should be read inconjunction with the equivalent IFRS measure. Further disclosures are providedunder "Use of Non-GAAP Financial Information" on page 61.---------------------------------------------------------------------------------------------------------------- See page 62 for definition of terms (1) These measures are stated excluding items not related to underlying business performance. See page 39 for a description of items not related to underlying business performance (2) Cumulative number at 30 September (3) Figures represent 100% of subsidiary information and a pro-rata share in joint ventures (4) With effect from 31 December 2004, Vodafone live! active devices in Japan have been included in the Group total as the service in Japan has become aligned with the Vodafone live! experience in other countries (5) Following a review of certain tariffs in Japan, the Group has reclassified an element of monthly fees received from contract customers from voice revenue to non-voice revenue to provide a more precise reflection of customer usage in the six months ended 30 September 2004. Further details are provided on page 6 GROUP PROPORTIONATE INFORMATION Six months to 30 September 2005 2004 Change % ---------------------------- £m £m £ Organic----------------------------------------------------------------------------------------------------------------Financial Revenue Mobile telecommunications - Germany 2,913 2,808 3.7 - Italy 2,240 2,091 7.1 - Spain 1,968 1,554 26.6 - UK 2,568 2,563 0.2 - Other mobile operations(1) 4,322 3,624 19.3 - Common functions(2) 70 58 Less: revenue between mobile operations (233) (172) ---------- ---------- 13,848 12,526 10.6 6.8 - Japan 3,619 3,122 15.9 - Associated undertakings and investments 5,948 5,139 15.7 ---------- ---------- 23,415 20,787 12.6 7.7 Other operations 602 511 17.8 Less: revenue between mobile and other operations (83) (119) ---------- ---------- 23,934 21,179 13.0 8.1 ---------- ---------- EBITDA(3) Mobile telecommunications - Germany 1,353 1,318 2.7 - Italy 1,207 1,119 7.9 - Spain 721 566 27.4 - UK 781 851 (8.2) - Other mobile operations(1) 1,503 1,334 12.7 - Common functions(2) 182 (2) ---------- ---------- 5,747 5,186 10.8 6.9 - Japan 787 864 (8.9) - Associated undertakings and investments 2,344 2,138 9.6 ---------- ---------- 8,878 8,188 8.4 4.2 Other operations 64 63 1.6 ---------- ---------- 8,942 8,251 8.4 4.2 ---------- ---------- Percentage Percentage EBITDA margin(2) Points Points Mobile telecommunications - Germany 46.4% 46.9% (0.5) - Italy 53.9% 53.5% 0.4 - Spain 36.6% 36.4% 0.2 - UK 30.4% 33.2% (2.8) - Other mobile operations(1) 34.8% 36.8% (2.0) ---------- ---------- 41.5% 41.4% 0.1 - Japan 21.7% 27.7% (6.0) - Associated undertakings and investments 39.4% 41.6% (2.2) ---------- ---------- Mobile EBITDA margin(3) 37.9% 39.4% (1.5) (1.3) (1) Excludes the results from associated undertakings. (2) Common functions represent revenue from Partner Markets and unallocated central Group income and expenses. (3) Charges for the use of the Vodafone brand and trademark have been revised with effect from 1 April 2005. The impact of the change was to reduce individual operating company EBITDA margins by up to 1.1 percentage points in the six months to 30 September 2005 though there is no material impact on mobile or Group EBITDA or EBITDA margin. See page 7 for details. Proportionate information is presented and calculated on the basis described onpages 57 to 58See page 62 for definition of terms---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 2005 2004 Organic Customers Million Million % Organic net proportionate customer additions in the six months to 30 September 10.0 7.4 35.1 Proportionate customers at 30 September 171.0 146.7 12.9 See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- OUTLOOK Please see "Forward-Looking Statements" on page 60 and definition of terms onpage 62. Where not explicitly stated on an organic basis, these expectations include theimpact of the acquisition of interests in MobiFon in Romania and Oskar in theCzech Republic, but exclude the impact of recently announced transactions inIndia, Sweden and South Africa as their completion is subject to certainconditions. For the year ending 31 March 2006 ("2006 financial year") The Group expects to deliver organic growth in proportionate mobile revenue inthe middle of the 6% to 9% range previously indicated. Continuing investment in customer growth is expected to result in the organicproportionate mobile EBITDA margin being at the lower end of the flat to 1percentage point lower range when compared to the 2005 financial year. Theexpected fall in the proportionate mobile EBITDA margin includes a decline inthe year on year EBITDA margin for Vodafone Japan for the full year similar tothat experienced in the first half of the year. Group capitalised fixed asset additions are anticipated to be in the £5.0billion to £5.4 billion range, including expenditure in Romania and the CzechRepublic. The Group continues to expect free cash flow to be within the £6.5 billion to£7.0 billion range previously indicated, including free cash flow from Romaniaand the Czech Republic. Share purchases by the Group are targeted to be approximately £6.5 billion. For the year ending 31 March 2007 ("2007 financial year") The following is a summary of the key trends expected for the 2007 financialyear. The Group will continue to focus on growing its operations and outperforming itscompetitors. Whilst strong revenue growth is expected from 3G enabled dataproducts it is likely that the overall rate of increase in proportionate mobilerevenue on an organic basis will be slightly lower than that anticipated for the2006 financial year due to both progressively higher levels of mobile penetration and a greater impact from changes in termination rates. The Group expects to exploit opportunities to grow its customer and revenue baseand consequently envisages a small decline in proportionate mobile EBITDAmargins outside Japan as the benefit of efficiencies in payroll and otheroperating expenses arising from the One Vodafone programme are more than offsetby additional investments in customer growth and changes in termination rates. In Japan, the Group remains confident that the ongoing improvements to itshandset range and the accelerated build out of its 3G network will enableVodafone Japan to increase its share of the market's overall growth in customersin the 2007 financial year. It is expected that the costs of funding this anticipated growth and the oppurtunities presented by the introduction of mobilenumber portability are likely to cause a further significant reduction in EBITDAmargin in the 2007 financial year as the Group seeks to rebuild momentum in the business. Group capitalised fixed asset additions, including those in Romania and theCzech Republic, are likely to be slightly higher than in the 2006 financialyear, with further investment in 3G coverage and commencement of the Group'srollout of HSDPA. The effective tax rate for the year is expected to increase by a similar amountto that anticipated for the full 2006 financial year due to a reduced level ofone-off restructuring opportunities. It is also expected that there will be asignificant increase in cash tax payments as a number of long standing taxissues are expected to reach resolution. As a result of the above factors, the Group expects free cash flow to be lowerthan that anticipated for the 2006 financial year. A detailed outlook, including the impact of the recently announced transactionsin India, Sweden and South Africa, will be provided with the preliminaryannouncement of results for the 2006 financial year in May 2006. BUSINESS REVIEW---------------------------------------------------------------------------------------------------------------- Six months to 30 September 2005 2004 % Change £m £m £ Organic Revenue Mobile telecommunications - Total service revenue 15,641 14,431 8.4 5.4 - Other revenue(1) 2,059 1,884 9.3 ---------- ---------- 17,700 16,315 8.5 5.8 Other operations 622 505 23.2 Less: revenue between mobile and other operations (71) (78) ---------- ---------- 18,251 16,742 9.0 6.4 ---------- ---------- Operating profit Adjusted operating profit - Mobile telecommunications 4,952 4,748 4.3 3.7 - Other operations 21 11 90.9 ---------- ---------- 4,973 4,759 4.5 3.9 Items not related to underlying business performance: - Impairment of intangible assets (515) - - - Non-operating income in associated undertakings 19 - - ---------- ---------- 4,477 4,759 (5.9) ---------- ---------- Mobile telecommunications Trading results Voice services(2) 12,705 11,875 7.0 3.9 Non-voice services(2) 2,936 2,556 14.9 12.2 ---------- ---------- Total service revenue 15,641 14,431 8.4 5.4 Net other revenue(1) 259 290 (10.7) Interconnect costs (2,377) (2,164) 9.8 Other direct costs (1,092) (986) 10.8 Net acquisition costs(1) (1,078) (1,007) 7.1 Net retention costs(1) (1,143) (900) 27.0 Payroll (1,131) (1,103) 2.5 Other operating expenses (2,451) (2,314) 5.9 ---------- ---------- EBITDA 6,628 6,247 6.1 3.1 Acquired intangibles amortisation (120) (31) Purchased licence amortisation (472) (449) 5.1 Depreciation and other amortisation (2,269) (2,103) 7.9 Share of result in associated undertakings 1,185 1,084 9.3 ---------- ---------- Adjusted operating profit 4,952 4,748 4.3 3.7 ---------- ---------- (1) Total mobile revenue includes £1,800 million (2004: £1,594 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results.(2) Following a review of certain tariffs in Japan, the Group has reclassified an element of monthly fees received from contract customers from voice revenue to non-voice revenue to provide a more precise reflection of customer usage. The impact of the change is to reduce voice revenue by £224m and increase messaging revenue by £74m and non-messaging data revenue by £150m for both the mobile business and Japan in the comparative period. There is no impact on service revenue or total revenue. See page 62 for definition of terms------------------------------------------------------------------------------------------------------------------------ Group Results Total revenue increased by 9.0% to £18,251 million for the six months ended 30September 2005, comprising organic growth of 6.4%, favourable movements inexchange rates of 1.4%, primarily from the Euro, and a further 1.2% from theacquisitions in the Czech Republic and Romania. Adjusted operating profit increased by 4.5% to £4,973 million, with underlyingorganic growth of 3.9%, following organic growth of 3.7% in the Group's mobilebusiness. Favourable exchange rate movements benefited reported growth for theGroup by 1.3% whilst the impact of acquisitions reduced reported growth by 0.7%,principally due to the amortisation of intangible assets resulting both from theacquisitions in the current period and the increase in the Group's effectiveshareholding in Japan in the prior period. The Group recorded an impairmentcharge to the carrying value of goodwill in Vodafone Sweden of £515 million toreflect the recoverable amount at 30 September 2005. This was the primary driverin the reduction in operating profit to £4,477 million, a decrease of 5.9% onthe prior period. MOBILE TELECOMMUNICATIONS RESULTS Revenue Revenue in the mobile business increased by 8.5%, or 5.8% on an organic basis,for the six months to 30 September 2005 due to a 5.4% increase in servicerevenue on an organic basis and growth in other revenue. Service revenue growthreflected a 12.4% organic increase in the average customer base of thecontrolled mobile networks and the Group's share of jointly controlled mobilenetworks, offset by a decline in ARPU in a number of markets followingtermination rate cuts, tariff adjustments in response to increased competitionand a higher proportion of lower spending prepaid customers across the Group. Voice revenue grew by 7.0%, or by 3.9% on an organic basis, with improvements inrevenue from outgoing and roaming traffic offset by a decline in incomingrevenue driven by termination rate cuts in several markets. Total voice minutesincreased by 17.0%, driven by a larger customer base and the success of usagestimulation initiatives. These factors, counterbalanced by tariff declines,resulted in growth in outgoing revenue. Roaming revenue benefited from thelaunch of Vodafone Passport in the current period. An increase of 29.6% in non-messaging data revenue, to £989 million, was theprincipal driver in the growth of non-voice service revenue to £2,936 millionfor the six months to 30 September 2005, a 12.2% increase on an organic basis.Registering an additional 2,740,000 3G devices in the last six months, including188,000 Vodafone Mobile Connect 3G/GPRS data cards, was the main factor in thenon-messaging data revenue growth, along with Vodafone live! for consumers andBlackBerry(R) from Vodafone in the business segment. Messaging revenue continuedto represent the largest component of non-voice revenue at £1,947 million forthe current period, an 8.6% increase over the prior period. Other revenue increased to £2,059 million, principally due to growth in revenuerelated to acquisition and retention activities in Spain and Japan. A 27.8% risein the number of gross customer additions, partially offset by a fall in theaverage revenue for handset sales to new prepaid customers, and a 23.3% increasein the number of upgrades, at a higher average price as customers upgraded tohigh-specification 3G handsets, led to a 12.9% growth in revenue related toacquisition and retention activities to £1,800 million. Adjusted operating profit Adjusted operating profit increased by 4.3% to £4,952 million, comprisingorganic growth of 3.7% and favourable exchange rate movements of 1.4% offset bythe impact of acquisitions in the current and prior periods. Interconnect costs increased by 6.2% on an organic basis, as strong growth invoice usage was only partially offset by cuts in termination rates in a numberof markets and an increased proportion of outgoing traffic being to otherVodafone customers, which does not result in interconnect expense. Acquisition and retention costs, net of attributable revenue, grew by 16.5% to£2,221 million, principally due to increased investment in retention activities,with Japan representing the largest element, as the number of upgrades grewstrongly with a marginally higher average subsidy per upgrade. Payroll and other operating expenses as a percentage of service revenuedecreased from 23.7% to 22.9% as the Group continued to realise costefficiencies. The charge relating to the amortisation of acquired intangible assets increasedto £120 million following the acquisitions in the Czech Republic and Romania inthe current period and the increase in the Group's effective shareholding inJapan in the prior period. Depreciation and other amortisation increasedprincipally due to acquisitions in the current period and the ongoing expansionof 3G networks. The Group's share of the result in associated undertakings, before items notrelated to underlying business performance, grew by 9.3% after the deduction ofinterest, tax and minority interest, and 8.5% before the deductions, primarilydue to growth at SFR in France. The Group's share of the result in VerizonWireless increased by 5.9% to £952 million, before deduction of interest, taxand minority interest. MOBILE TELECOMMUNICATIONS - REVIEW OF OPERATIONS Vodafone operating companies are licensed on an arms length basis to use theVodafone brand and related trademarks. These arrangements have been reviewedand the charges for the use of the Vodafone brand and related trademarks wererevised with effect from 1 April 2005 to reflect the positioning of the brand inthe current markets. There is no material impact on the Group's overalloperating profit or EBITDA margin. The impact of the change is to reduceindividual operating company margins by up to 1.1 percentage points, dependingon the operating company, with a corresponding increase in the profitattributable to the Common functions segment, which forms part of the mobiletelecommunications business. GERMANY ----------------------------------------------------------------------------------------------------------------Financial highlights Six months to 30 September 2005 2004 % Change £m £m £ • Total revenue(1) 2,913 2,808 3.7 2.0 ---------- ---------- Trading results Voice services 2,225 2,185 1.8 0.2 Non-voice services 536 451 18.8 16.7 ---------- ---------- Total service revenue 2,761 2,636 4.7 3.0 Net other revenue(1) 49 69 (29.0) (30.6) Interconnect costs (394) (377) 4.5 2.8 Other direct costs (144) (158) (8.9) (9.8) Net acquisition costs (1) (179) (166) 7.8 5.5 Net retention costs(1) (180) (157) 14.6 13.0 Payroll (208) (207) 0.5 (1.7) Other operating expenses (352) (322) 9.3 7.6 ---------- ---------- EBITDA 1,353 1,318 2.7 1.0 Purchased licence amortisation (171) (168) 1.8 - Depreciation and other amortisation (407) (371) 9.7 7.9 ---------- ---------- Adjusted operating profit 775 779 (0.5) (2.1) ---------- ---------- EBITDA margin 46.4% 46.9% KPIs Closing customers ('000) 28,259 26,092 8.3 Average monthly ARPU €24.4 €25.7 (5.1) (1) Total revenue includes £103 million (2004: £103 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results See page 62 for definition of terms---------------------------------------------------------------------------------------------------------------- Vodafone achieved strong customer growth in a competitive market, consolidatedits market position in 3G offerings with innovative new products, includingMobile TV, and launched Vodafone Zuhause, an alternative to a fixed line networkallowing private householders and home office users to replace their existingfixed line connection. In September 2005, Vodafone launched 3G services forprepaid customers and commenced customer trials of High Speed Downlink PacketAccess ("HSDPA") technology which enables data transmission speeds of up to 2megabits per second. Total revenue grew by 2.0%, when measured in local currency, due to a 3.0%increase in service revenue, primarily driven by a larger customer base, partlyoffset by lower other revenue. Competitively priced prepaid offerings includingnew text packages and tariff options for evening and weekend calls, selectivetop-up promotions and a new internet-only low cost tariff along with the successof 3G, new voice bundles and the launch of Vodafone Zuhause, led to growth inthe average customer base of 8.7% compared with the comparative period. Newvoice bundles, which had attracted more than 4 million customers at 30 September2005, were the main factor in the 11.1% increase in voice usage by contractcustomers and contributed to the 0.9 percentage points fall in contract churn to13.7% for the period. A rise in the number of lower spending prepaid customersalong with a fall in activity level and a cut in the mobile call terminationrate from 14.3 eurocents to 13.2 eurocents in the second half of the previousfinancial year had a dilutive effect on ARPU, and particularly impacted servicerevenue growth in the second quarter, whilst growth in the first quarterbenefited from the timing of Easter holidays compared to the prior period. Non-voice service revenue increased by 16.7% in local currency compared to thesix months to 30 September 2004, primarily due to the success of non-messagingdata offerings, the revenue from which increased by 75.4% in local currency, to£117 million. Vodafone continued to lead the 3G market in Germany with 815,000registered 3G devices on the network at 30 September 2005, including 148,000Vodafone Mobile Connect 3G/GPRS data cards. In the consumer segment, the numberof active Vodafone live! devices increased by 13.7% over the six month period to5,508,000 at 30 September 2005. Investment in customer retention and an increase in the Group's charge for theuse of the brand and related trademarks, representing 1.1 percentage points ofthe change in EBITDA margin and reported in other operating expenses, led to adecrease in EBITDA margin of 0.5 percentage points to 46.4%. Interconnect costsrose broadly in line with service revenue as an 8.9% increase in total voiceusage was partially offset by the termination rate cut. A higher proportion ofnew 3G customers, as discussed above, and a 9.2% rise in gross customeradditions led to an increase of 5.5% in net acquisition costs, in localcurrency. Adjusted operating profit was impacted by increased depreciationcharges resulting from the ongoing 3G network roll out and the disposal ofassets due to the standardisation of network equipment. ITALY ----------------------------------------------------------------------------------------------------------------Financial highlights Six months to 30 September 2005 2004 % Change £m £m £ • Total revenue(1)(2) 2,240 2,091 7.1 5.3 ---------- ---------- Trading results(2) Voice services 1,816 1,720 5.6 3.8 Non-voice services 343 283 21.2 18.9 ---------- ---------- Total service revenue 2,159 2,003 7.8 6.0 Net other revenue(1) 5 5 - (13.1) Interconnect costs (366) (357) 2.5 0.9 Other direct costs (122) (112) 8.9 6.3 Net acquisition costs (1) (39) (29) 34.5 30.8 Net retention costs(1) (41) (31) 32.3 29.4 Payroll (123) (126) (2.4) (4.0) Other operating expenses (266) (234) 13.7 11.9 ---------- ---------- EBITDA 1,207 1,119 7.9 6.0 Purchased licence amortisation (37) (36) 2.8 - Depreciation and other amortisation (247) (239) 3.3 1.7 ---------- ---------- Adjusted operating profit 923 844 9.4 7.5 ---------- ---------- EBITDA margin 53.9% 53.5% KPIs Closing customers ('000)(2) 17,884 16,654 7.4 Average monthly ARPU €30.1 €30.3 (0.7) (1) Total revenue includes £76 million (2004: £83 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results.(2) Italy is a joint venture and is proportionately consolidated by the Group and hence the results and customers reported represent the Group's average effective interest, being 76.8% for the six months to 30 September 2005 (2004: 76.8%).See page 62 for definition of terms---------------------------------------------------------------------------------------------------------------- In an intensely competitive market, Vodafone continued to perform strongly inItaly through customer growth, driven by successful summer promotions, and afocus on high value customers. Average customer growth of 6.5% was achieveddespite market penetration levels well in excess of 100% due to customers havingmore than one SIM. In local currency, total revenue increased by 5.3%, reflecting the growth inservice revenue achieved from an increase in the average customer base. This waspartially offset by a slight decrease in ARPU following a cut in terminationrates averaging 20.5% from 1 September 2005 which impacted service revenuegrowth and interconnect costs in the second quarter. Strong promotionalinitiatives over the summer, comprising free calls and text messages for a smallactivation fee, were taken up by more than 4 million customers and stimulatedvoice and text usage. Total voice usage increased by 5.5% compared with the sixmonths to 30 September 2004, with a higher proportion of voice minutes fromcalls between Vodafone customers, which do not result in interconnect costs.Targeted retention activities and a focus on high value customers led to areduction in contract customer churn to 14.7% from 18.0% for the prior periodand limited the increase in total churn, which rose over the prior period by 1.6percentage points to 18.0%. In the business segment, the positive net customerinflow from mobile number portability continued, reflecting the attractivenessof its business offerings, including products such as the Vodafone MobileConnect data card and Vodafone Passport. Non-voice service revenue increased by 18.9% in local currency, with revenuefrom messaging increasing to £297 million, representing growth of 15.4% in localcurrency. Non-messaging data revenue grew by 48.7% driven by the success of 3Gofferings and a 124.2% increase in the Group's share of the number of activeVodafone live! devices over the past twelve months. At 30 September 2005, theGroup's share of registered 3G devices was 1,044,000 compared with 511,000 at 31March 2005. The EBITDA margin grew by 0.4 percentage points to 53.9%, despite an increase inthe cost of acquiring and retaining customers in response to competitivepressures, though these costs remain low as a percentage of service revenuecompared to other markets, and higher operating expenses from increasedmarketing and network costs as 3G network coverage continued to improve. Inlocal currency, adjusted operating profit increased by 7.5% due to the samefactors. JAPAN ----------------------------------------------------------------------------------------------------------------Financial highlights Six months to 30 September 2005 2004 % Change £m £m £ Y Total revenue(1) 3,704 3,689 0.4 (0.4) ---------- ---------- Trading results Voice services(2) 1,889 2,015 (6.3) (6.3) Non-voice services(2) 815 830 (1.8) (1.8) ---------- ---------- Total service revenue 2,704 2,845 (5.0) (5.0) Net other revenue(1) 7 11 Interconnect costs (238) (250) (4.8) (5.1) Other direct costs (133) (119) 11.8 12.3 Net acquisition costs (1) (294) (322) (8.7) (8.9) Net retention costs(1) (460) (320) 43.8 43.3 Payroll (74) (115) (35.7) (36.4) Other operating expenses (708) (708) - (0.2) ---------- ---------- EBITDA 804 1,022 (21.3) (23.2) Acquired intangibles amortisation (68) (30) Depreciation and other amortisation (545) (569) (4.2) (4.3) ---------- ---------- Adjusted operating profit 191 423 (54.8) (57.1) ---------- ---------- EBITDA margin 21.7% 27.7% KPIs Closing customers ('000) 14,991 15,123 (0.9) Average monthly ARPU Y5,983 Y6,279 (4.7) (1) Total revenue includes £993 million (2004: £833 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading results(2) Following a review of certain tariffs, the Group has reclassified an element of monthly fees received from contract customers from voice revenue to non-voice revenue to provide a more precise reflection of customer usage. More details are provided on page 6See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- Market conditions for Vodafone in Japan continue to be challenging. Vodafone isin the process of returning to customer growth through more competitive servicesand pricing coupled with an improving 3G network and handset range, mostrecently demonstrated by the announcement of improvements to the handset rangefor the winter sales period. In local currency, revenue decreased marginally by 0.4% as the increase inequipment revenue related to acquisition and retention activities was offset bya 5.0% reduction in service revenue. The decrease in service revenue followed adecline in ARPU and a slight decline in the average customer base. The loss ofhigher value customers, following a lack of a competitive 3G offering, and thetotal ban on using mobile phones whilst driving introduced in November 2004, ledto the reduction in ARPU. The revenue uplift from the introduction of newtariffs in the second quarter of the prior period has not been replicated in thecurrent period. Revenue related to acquisition and retention activities improvedby 19.2% in local currency due to increased sales of higher specificationhandsets, particularly from retention activities, which outweighed lower grossconnections. New flat rate messaging and data tariffs improved the competitiveness of thenon-voice offerings and were a significant contributory factor in an additional816,000 3G devices being registered to the network in the six months to 30September 2005, bringing the total to 1,614,000. Non-voice revenue decreased by1.8% in local currency, to £815 million, as the growth in non-messaging data wasoffset by the loss of higher value customers. Non-messaging data revenueincreased by 12.4% in local currency, to £615 million for the six months to 30September 2005, resulting from higher usage of data products and services andthe fact that messaging transmitted via the 3G network is reported as datarevenue in Japan as 3G messages are packet-based. Investment in customer retention in response to competitive pressurescontributed to a reduction in customer churn from 23.1% for the six months toSeptember 2004 to 19.7% for the current period and, along with the dilution ofARPU and higher direct costs resulting from lower provisions for slow movinghandset stocks in the comparative period, led to the EBITDA margin falling 6.0percentage points to 21.7%. These factors were partially offset by a reductionin gross connections leading to lower net acquisition costs. Adjusted operatingprofit was impacted by the factors above and an increase in the amortisation ofacquired intangible assets recognised following the Group's increase in itseffective shareholding in Japan in the six months ended 30 September 2004. On 9 November 2005, the government of Japan awarded two licences for 1.7GHz andone licence for 2.0GHz spectrum to potential new mobile market entrants. Theselicences carry obligations to deploy national coverage within an allocated timeframe. The new market entrants are expected to start limited service from late2006. SPAIN ----------------------------------------------------------------------------------------------------------------Financial highlights Six months to 30 September 2005 2004 % Change £m £m £ • Total revenue(1) 1,968 1,554 26.6 24.6 ---------- ---------- Trading results Voice services 1,546 1,246 24.1 22.1 Non-voice services 251 180 39.4 37.1 ---------- ---------- Total service revenue 1,797 1,426 26.0 24.0 Net other revenue(1) 1 1 - - Interconnect costs (323) (266) 21.4 19.5 Other direct costs (155) (117) 32.5 29.5 Net acquisition costs (1) (123) (115) 7.0 5.5 Net retention costs(1) (114) (75) 52.0 48.7 Payroll (76) (66) 15.2 13.4 Other operating expenses (286) (222) 28.8 26.8 ---------- ---------- EBITDA 721 566 27.4 25.5 Purchased licence amortisation (34) (34) - - Depreciation and other amortisation (158) (135) 17.0 14.5 ---------- ---------- Adjusted operating profit 529 397 33.2 31.4 ---------- ---------- EBITDA margin 36.6% 36.4% KPIs Closing customers ('000) 12,418 10,452 18.8 Average monthly ARPU €37.0 €35.4 4.5 (1) Total revenue includes £170 million (2004: £127 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading resultsSee page 62 for definition of terms---------------------------------------------------------------------------------------------------------------- Vodafone continued to deliver strong growth in Spain through a focus on customergrowth, targeted summer campaigns and excellent customer service, as well as theretention of high value customers, alongside propositions encouraging bothcustomer transition from prepaid to contract and increased voice usage. In local currency, total revenue for the six months to 30 September 2005increased by 24.6%, principally as a result of a 24.0% rise in service revenue.The average customer base grew by 18.8% owing to 1,967,000 new customers fromthe successful summer campaign and attractive tariffs combined with a successfulcustomer retention strategy and net inflow of customers from mobile numberportability. Additionally, a continuing campaign encouraging customers to switchfrom prepaid to contract helped the percentage of contract customers increasefrom 45.4% at 30 September 2004 to 48.0% at 30 September 2005. Growth of 38.0%in voice usage, driven by promotions, a larger customer base and a higherproportion of contract customers, resulted in a 4.5% increase in ARPU, despite a10.5% cut in termination rates in November 2004. Non-voice service revenue increased by 37.1%. Promotions encouraging usageresulted in text message volumes increasing by 26.6% in the six months to 30September 2005. Although messaging remains the principal driver for the rise innon-voice service revenue, non-messaging data revenue continues to increase itsshare of non-voice service revenue, increasing by 85.7% in local currency to £46million. This is driven by the success of 3G services, with 315,000 devicesregistered by 30 September 2005, and Vodafone live!, which has 4,132,000 devicesusing the service. The EBITDA margin for the six months to 30 September 2005 increased by 1.3percentage points compared to the prior period, excluding an increase in theGroup charge for use of the brand and related trademarks which resulted in a 1.1percentage point fall in EBITDA margin. Both acquisition costs and interconnectcosts fell as a proportion of service revenue, the latter due to the cut intermination rates combined with promotions focusing on calls to Vodafone andfixed-line numbers, which incur lower interconnect costs. These falls werecounteracted by a 48.7% rise in net retention costs, which resulted from a focuson retaining customers and led to a reduction in churn levels from 23.0% for thesix months to 30 September 2004 to 21.2% for the current period. Other directcosts increased 29.5%, primarily as a result of an increase in content provisioncosts arising from the increase in data traffic. UNITED KINGDOM ----------------------------------------------------------------------------------------------------------------Financial highlights Six months to 30 September 2005 2004 % Change £m £m Total revenue(1) 2,568 2,563 0.2 ---------- ---------- Trading results Voice services 1,864 1,879 (0.8) Non-voice services 453 404 12.1 ---------- ---------- Total service revenue 2,317 2,283 1.5 Net other revenue(1) 68 93 (26.9) Interconnect costs (438) (410) 6.8 Other direct costs (180) (189) (4.8) Net acquisition costs (1) (216) (186) 16.1 Net retention costs(1) (199) (198) 0.5 Payroll (205) (208) (1.4) Other operating expenses (366) (334) 9.6 ---------- ---------- EBITDA 781 851 (8.2) Acquired intangibles amortisation (2) - Purchased licence amortisation (166) (166) - Depreciation and other amortisation (293) (289) 1.4 ---------- ---------- Adjusted operating profit 320 396 (19.2) ---------- ---------- EBITDA margin 30.4% 33.2% KPIs Closing customers('000) 15,764 14,600 8.0 Average monthly ARPU £24.9 £26.6 (6.4) (1) Total revenue includes £183 million (2004: £187 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading resultsSee page 62 for definition of terms---------------------------------------------------------------------------------------------------------------- The UK continues to be one of the most competitive markets in which Vodafoneoperates, with among the highest penetration rates in Europe. Nevertheless,Vodafone has maintained its lead in revenue market share and has continued to besuccessful in attracting customers and generating additional usage, particularlyby contract customers, through enhancing consumer offerings and building onleadership in business. Total revenue for the six months to 30 September 2005 increased marginally, asthe benefits of a growing customer base and increasing non-voice revenue werenegated by a fall in other revenue and the 30% cut in termination ratesintroduced on 1 September 2004 for all UK mobile network operators, excludingthe new third generation operator. ARPU fell by 6.4%, as reduced voice ARPU,including the effect of the termination rate cut and a higher proportion oflower spending prepay customers, was partially offset by growth in non-voicerevenue. Excluding the impact of the termination rates cut, service revenue grewby 4.8%, principally due to an 8.7% increase in the average customer base. Increased investment in acquisition activity and enhanced consumer offeringsdrove customer growth in the six months to 30 September 2005. Contract netadditions increased 31.8% for the six months to 30 September 2005 compared tothe same period last year despite a slight reduction in the net acquisition costper gross addition. Consumer offerings launched in the period included the 'Stopthe Clock' proposition which allows customers on 18 month contracts to talkoff-peak for up to 60 minutes and only pay for 3 minutes. In the businesssegment, the 'Perfect Fit for Business' tariffs increased revenue and usage. The principal driver behind the 12.1% rise in non-voice revenue was an increaseof 57.9% in non-messaging data revenue to £103 million, primarily due to thesuccess of offerings such as Vodafone live!, with 3,963,000 active devices at 30September 2005, 3G, with 438,000 registered devices including 97,000 businessdevices, and BlackBerry(R) from Vodafone with 179,000 registered devices. Investments in customer acquisition, a rise in interconnect costs and provisionsfor one-off call centre closures led to a fall in EBITDA margin of 1.8percentage points, with an additional 1.0 percentage point of the fall due tothe increase in the Group charges for use of the brand and related trademarks.The increased investment in acquisition activity along with broadly stablecontract churn has led to growth in the customer base, including higher spendingcontract customers, and provides a strong platform for future growth. Contractchurn in the current period benefited from focused upgrade activity and a higherproportion of the customer base being on 18 month contracts. An increase in theproportion of upgrades through Vodafone's own channels enabled net retentioncosts to be kept stable despite a 9.4% rise in the volume of upgrades.Interconnect costs increased as total voice usage grew by 9.6%, driven by ahigher customer base, usage stimulation initiatives for contract customers suchas 'Stop the Clock' and a higher proportion of outgoing calls made to othermobile networks, partially offset by the impact of termination rate cuts. AMERICAS - Verizon Wireless ----------------------------------------------------------------------------------------------------------------Financial highlights Six months to 30 September 2005 2004 % Change £m £m £ $ Adjusted operating profit 772 738 4.6 5.2 ---------- ---------- Share of result in Operating profit 952 899 5.9 6.3 associated Interest (100) (92) 8.7 undertakings Tax (54) (44) 22.7 Minority interest (26) (25) 4.0 ---------- ---------- 772 738 4.6 5.2 ---------- ---------- Proportionate revenue 3,916 3,433 14.4 Proportionate EBITDA margin 37.1% 39.3% KPIs Closing customers ('000) 49,291 42,118 17.0 Average monthly ARPU $51.6 $53.2 (3.0) Acquisition and retention costs as a percentage of service revenue 13.2% 12.3% See page 62 for definition of terms ---------------------------------------------------------------------------------------------------------------- The US market has recently experienced considerable consolidation, including themergers of Cingular and AT&T Wireless, Sprint and Nextel, and Alltel and WesternWireless. Penetration has reached approximately 66% as at 30 June 2005, withVerizon Wireless' customer market share at approximately 24%. Despite the consolidation, Verizon Wireless continued to outperform itscompetitors, ranking first in customer net additions for the six months to 30September 2005, with the total customer base increasing by 8.4% in the currentperiod to 49,291,000. The strong customer growth has benefited from a churn ratewhich is amongst the lowest in the US mobile industry and which has continued toimprove from 17.9% for the six months to 30 September 2004 to 15.1% for thecurrent period. In local currency, proportionate service revenue increased by 13.6%, driven bythe larger customer base offset by a decrease in ARPU. The ARPU decline of 3.0%was primarily due to tariff pricing changes earlier in 2005 and increases in thesize of bundled minute plans. The growth in the customer base and the largerbundle sizes contributed to a 35% growth in total minutes of use. Non-voice service revenue increased by 96.9% over the prior period andrepresented 7.5% of service revenue in the six months to 30 September 2005.Non-voice revenue growth was primarily generated by increased SMS and MMS usageand growth in new products including V CAST(SM), VZMail and BroadbandAccess. VCAST(SM) and BroadbandAccess are delivered over Verizon Wireless' EV-DO network,which is expected to cover nearly half of the population by the end of 2005. The EBITDA margin remained strong, but declined from 39.3% in the prior periodto 37.1%. The margin reduction was primarily caused by lower ARPU and increasedcosts of acquisition and retention resulting from the industry leading customergrowth. In local currency, the Group's share of Verizon Wireless' operatingprofit increased by 6.3%. The Group's share of the tax attributable to VerizonWireless of £54 million for the six months to 30 September 2005 relates only tothe corporate entities held by the Verizon Wireless partnership. The taxattributable to the Group's share of the partnership's pre-tax profit isincluded within the Group tax charge. Vodafone and Verizon Wireless are engaged in a number of joint projects to bringglobal services to their customers. In September 2005, Vodafone and VerizonWireless jointly launched a two card international data roaming solution whichallows Vodafone's customers to use Verizon Wireless' broadband coverage in theUS and provides Verizon Wireless' customers with coverage in 50 countriesglobally. Verizon Wireless has recently strengthened its spectrum position with theclosing of the purchase of several key spectrum licences, including licencesfrom NextWave, Leap Wireless, Metro PCS, and through participation in the FCC'sAuction 58. OTHER MOBILE OPERATIONS ----------------------------------------------------------------------------------------------------------------Financial highlights Six months to 30 September 2005 2004 % Change £m £m £ Organic Total revenue Subsidiaries 3,826 3,176 20.5 Joint ventures 632 548 15.3 Less: intra-segment revenue (17) (12) ---------- ---------- 4,441 3,712 19.6 10.9 ---------- ---------- Adjusted Subsidiaries 706 717 (1.5) operating profit Joint ventures 170 133 27.8 Associated undertakings 413 346 19.4 ---------- ---------- 1,289 1,196 7.8 4.5 ---------- ---------- Trading results Voice services 3,536 2,975 18.9 Non-voice services 568 427 33.0 ---------- ---------- Total service revenue 4,104 3,402 20.6 Net other revenue(1) 62 51 21.6 Interconnect costs (819) (668) 22.6 Other direct costs (345) (277) 24.5 Net acquisition costs (1) (228) (189) 20.6 Net retention costs(1) (149) (119) 25.2 Payroll (307) (257) 19.5 Other operating expenses (733) (572) 28.1 ---------- ---------- EBITDA 1,585 1,371 15.6 5.4 Acquired intangibles amortisation (50) - Purchased licence amortisation (63) (44) 43.2 Depreciation and other amortisation (596) (477) 24.9 Share of result in associates 413 346 19.4 ---------- ---------- Adjusted operating profit 1,289 1,196 7.8 4.5 ---------- ---------- EBITDA margin 35.7% 36.9% Share of result Operating profit 598 529 13.0 in associates Interest (7) (5) Tax (178) (178) ---------- ---------- 413 346 19.4 ---------- ---------- (1) Total revenue includes £275 million (2004: £259 million) which has been excluded from net other revenue and deducted from acquisition and retention costs in the trading resultsSee page 62 for definition of terms---------------------------------------------------------------------------------------------------------------- Total revenue for the Group's Other Mobile Operations increased by 19.6%, or10.9% on an organic basis. Favourable exchange rate movements represented 3.3%of the difference between reported and organic growth, whilst the acquisitionsin the Czech Republic and Romania in the six months to 30 September 2005increased reported growth by 5.4%. The organic increase in total revenue wasdriven principally by organic service revenue growth, which improved as a resultof growth in average customers of 23.5% excluding the impact of theacquisitions, and by 36.5% including the acquisitions, offset by cuts intermination rates in certain markets and ARPU dilution from tariff adjustmentsand from an increase in the number of lower usage prepaid customers. Non-voiceservice revenue continued to grow strongly and represented 13.8% of servicerevenue for the six months to 30 September 2005. Investment in customer retention and an increase in the Group's charge for theuse of the brand and related trademarks amounting to a 0.6 percentage pointsfall in the EBITDA margin, partially offset by the higher margins of theacquisitions, led to a decrease in the EBITDA margin to 35.7%. Adjusted operating profit increased by 7.8% and 4.5% on an organic basis overthe comparative period, with 0.4% of the difference due to the acquisitions inthe current period and 2.9% resulting from favourable foreign exchange ratemovements. Higher depreciation and purchased licence amortisation, following thelaunch of 3G services, and amortisation of identifiable intangible assets fromthe acquisitions in the Czech Republic and Romania, impacted the reported growthin adjusted operating profit for the six months to 30 September 2005. Other Mobile subsidiaries Local currency service revenue grew by 7.3% in Greece due to a 12.7% increase inthe average customer base offset by a reduction in ARPU due primarily to thereduced rates for incoming traffic. In Egypt, service revenue grew by 34.6% in local currency as a result of theaverage customer base increasing by 57.8%, primarily driven by attractivetariffs, especially in the prepaid market, and the success of innovative newproducts and services, such as allowing the transfer of airtime betweencustomers. A cut in average termination rates of approximately 24% in Portugal in March2005 and an increase in value-added taxes led to service revenue growth beingrestricted to 0.9% in spite of an 11.2% rise in the average customer base andstrong growth in non-voice revenue following the success of 3G serviceofferings. The market in Sweden continued to be challenging due to intense competitiondriving down prices, with a 3.2% decline in service revenue in spite of stronggrowth in non-voice service revenue, an increase in average customers and ahigher proportion of contract additions resulting from increased acquisitioninvestment. On 31 October 2005, the Group announced that its 100% interest inVodafone Sweden is to be sold to Telenor, the pan-Nordic telecommunicationsoperator. The sale is expected to be completed by 31 December 2005, subject toEU regulatory approval. Vodafone and Telenor have agreed the terms of a PartnerNetwork Agreement in Sweden, allowing Vodafone Sweden and Vodafone customers tocontinue to benefit from Vodafone's global brand, products and services inSweden. In the Netherlands, a 5.8% increase in service revenue was achieved in a highlycompetitive market through continued growth in the customer base, stimulated byattractive price plans and the launch of 3G. In Ireland, customer growth and the success of non-voice offerings led to a 6.7%increase in service revenue. In the intensely competitive Australian market, the success of new bundled plansled to customer growth of 14.3% and a significant increase in voice usage, whichalso adversely impacted interconnect costs. In local currency, servicerevenue rose by 6.3%, despite a decline in ARPU due to the large number ofcustomers migrating to the new tariffs. 3G services were launched on 31 October2005. Other Mobile joint ventures Average proportionate customers for the Group's joint ventures, excluding Italy,increased by 39.0% in the six months to 30 September 2005, with particularlystrong growth in markets with relatively low penetration rates, particularlySouth Africa. The customer growth generated a 27.8% rise in adjusted operatingprofit. Other Mobile associated undertakings In France, mobile to mobile termination fees were introduced for the first timein 2005. As a result, SFR experienced a significant increase in incomingrevenue, with a similar sized increase in interconnection costs. Excluding theimpact of mobile to mobile termination fees, SFR reported strong growth inrevenue and operating profit, principally due to an 8.1% increase in averagecustomers compared to the prior period. Usage of both voice and non-voiceservices grew in the period, and SFR had a total of 3,823,000 Vodafone live!customers at 30 September 2005. Since launching consumer 3G services in November2004, SFR has established a customer base of 399,000 at 30 September 2005. Other Mobile investments China Mobile, in which the Group has a 3.27% stake, and which is accounted foras an available-for-sale investment, grew its customer base by 9.8% over the sixmonths to 234.9 million at 30 September 2005. Dividends of £41 million werereceived in the six months to 30 September 2005. Other Operations ----------------------------------------------------------------------------------------------------------------Financial highlights Period ended 30 September 2005 2004 % Change £m £m £ Revenue Germany 622 505 23.2 ---------- ---------- Adjusted operating profit Germany 38 17 123.5 France (17) (6) ---------- ---------- 21 11 90.9 ---------- ---------- See page 62 for definition of terms---------------------------------------------------------------------------------------------------------------- Other operations comprise interests in fixed line telecommunications businessesin Germany and France. Germany In local currency, Arcor's revenue increased by 21.0%, primarily due to customerand usage growth, partially offset by tariff decreases in the competitivemarket. The incumbent fixed line market leader continues to drive this intensecompetition, although Arcor further strengthened its position as the maincompetitor. Contract ISDN voice (direct access) customers increased by 57% to1,120,000 and contract DSL (broadband internet) customers by 90% to 863,000 inthe six months to 30 September 2005. The revenue growth and further costefficiencies led to an improvement in EBITDA. France The Group's associated undertaking, Cegetel, merged with neuf telecom on 22August 2005, leaving Vodafone with a proportionate interest of 12.4% in theenlarged group, neuf cegetel. GLOBAL SERVICES One Vodafone The One Vodafone initiatives are targeted at achieving savings in operatingexpenses and enhancing revenue for the Group's controlled mobile businesses andthe Group's jointly controlled mobile business in Italy. The Group expects that, in the year ending 31 March 2008 ("2008 financialyear"), operating expenses, being the aggregate of payroll, other operatingexpenses, and capitalised fixed asset additions, will be broadly similar tothose for the year ended 31 March 2004, assuming no significant changes inexchange rates and after adjusting for acquisitions and disposals. The Group istargeting mobile capitalised fixed asset additions in the 2008 financial year tobe 10% of mobile revenue as a result of the initiatives. Revenue enhancement initiatives are expected to deliver benefits equivalent toat least 1% additional revenue market share in the 2008 financial year comparedwith the 2005 financial year. The Group will measure the revenue benefits in itsfour principal controlled markets and jointly controlled market in Italycompared to its established competitors. The objective for the current financial year ("2006 financial year") has been tobegin implementation of the plans outlined last year. Significant benefits areexpected in the 2007 financial year, with the full targets expected to be met inthe 2008 financial year. The One Vodafone programme has focused on six key initiatives as follows: * The network initiative has developed plans in the radio area to standardise specifications for base stations and accessories to leverage buying power and improve efficiency in, for example, power consumption and leased line usage. In core networks, the Group is advancing towards an all IP network, thereby simplifying and reducing the number of component parts and leading to lower costs. Through increasing the amount of self built transmission, both through microwave links and owned dark fibre, costs should be reduced and future cost escalation limited as the volume of data traffic grows. * The service platforms initiative is creating shared service centres to host the European development and operations of services. The shared service Vodafone live! portal is now providing a hosting service for five operating companies and more are planned to migrate in the current financial year. Other platforms are also being migrated and new services are being implemented for the first time on the shared service platform only. The centralisation is designed not only to reduce costs but also to increase revenue through reduced time to market for new products and services. * IT is the most complex initiative and focuses on the two areas of data centres and application consolidation. For data centres, which host the servers to support billing and customer relationship management ("CRM") systems, consolidation is underway and one organisation has been created in Europe with the objective of reducing eleven centres down to three. Data centres represent around 25% of the overall Group IT cost and plans are in place to reduce this cost by over 20%. The larger part of the IT effort is focused on application consolidation, a highly complex and business critical multi-year project, which will continue through to 2008 and beyond. * The customer management programme is initially focused on implementing best practice across the Group. In the longer term, the objective is to implement a single CRM system. In the first half of the 2006 financial year, a single help desk for multi-national customers and centralised support for our roaming customers have been launched. * The focus of the terminals programme is to reduce the number of terminals in the overall range, increasing the number of customised terminals to drive cost reductions. In addition, complexity in the terminals should be reduced by standardising components and moving to a smaller number of technology platforms. It is expected that these activities will drive incremental revenue benefits, as well as cost savings, through reduced churn and higher ARPU per handset. * Finally, the focus of the roaming initiative is to transform customers' roaming experience, primarily through reducing barriers to usage. Vodafone Passport has been launched in twelve countries and initial take-up has been encouraging. Improvements in customer satisfaction and a higher proportion of customers roaming on to Vodafone networks have been noted since launch. Vodafone live! Vodafone live!, the Group's integrated communications and multimediaproposition, has continued to grow strongly. The proposition, targeted primarilyat the "young active fun" segment, is available in 23 markets, comprising 16 ofthe Group's controlled and jointly controlled networks, three of the Group'sassociated companies and four Partner Markets. There were 35.0 million Vodafonelive! active devices, including 12.8 million in Japan, on controlled and jointlycontrolled networks at 30 September 2005, with an additional 4.7 million devicesconnected in the Group's associated companies. In June 2005, Vodafone announced plans to launch a seamless instant messagingservice between PCs and mobile phones. Mobile Instant Messaging will workseamlessly with Microsoft's MSN Messenger, delivering an enhanced messagingoffer for MSN and Vodafone customers who want to stay in touch with friends,family and colleagues. Vodafone live! with 3G In November 2004, the Group launched Vodafone live! with 3G across 13 marketswith an initial portfolio of 10 handsets. At 30 September 2005, Vodafone live!with 3G has been launched in a further three markets (New Zealand, South Africaand Belgium), and is now available on 25 handsets. There were 4.5 milliondevices registered in controlled and jointly controlled networks with thecapability of accessing the Vodafone live! with 3G portal at 30 September 2005.Since then, Vodafone live! with 3G has been launched in a further two markets(Croatia and Australia) making it available in 18 markets in total. Vodafone live! with 3G customers can now experience news broadcasts, sportshighlights, full track music downloads, music videos, movie trailers and a hostof other video content at a quality approaching that of digital television. TVbroadcast services have now been launched in ten of the Group's controlled andjointly controlled networks, three associated companies and one Partner Market,and these will be developed further in the coming year. The wide bandwidth of 3Gsupports access to sophisticated 3D games and Vodafone has introduced a range ofbranded titles. Vodafone Passport The Vodafone Travel Promise was launched during May 2005, the first element ofwhich is the Vodafone Passport voice roaming price plan which provides customerswith greater price clarity when using their mobile voice services abroad. For aone-off connection fee per call determined by the network operator, customerswho sign up to the Vodafone Passport price plan can make voice calls at domesticrates when roaming on Vodafone's controlled networks (excluding Egypt) and thenetworks of selected joint ventures and associated companies. In addition, whenreceiving calls abroad, customers will pay the same connection fee, allowingthem to talk for up to a maximum of 60 minutes, for no additional charge.Vodafone Passport has been launched in twelve markets with over 2.8 millioncustomers registered in the Group's controlled and jointly controlled networksby 30 September 2005. Forming part of the Vodafone Travel Promise, a second roaming pricing initiativewas launched in June 2005. This new data roaming tariff, specifically tailoredto suit the needs of our business customers, offers simple and predictableroaming pricing. For a flat rate, customers can send or receive large volumes ofdata when using the Vodafone Mobile Connect service on participating Vodafonenetworks. Plans are in place to further develop the Vodafone Travel Promise through theaddition of improved geographical coverage and additional services to assist ourcustomers when calling from abroad. Vodafone Simply Vodafone Simply, the Group's proposition designed for people who just want tomake calls and send texts with minimum complexity, was launched in May 2005. At30 September 2005, Vodafone Simply was available in 12 markets, comprising nineof the Group's controlled and jointly controlled networks, one of the Group'sassociated companies and two Partner Markets. Plans are in place to launch thisproposition in an additional four markets during November 2005, including Italy. Business services During the year, the Group has continued to strengthen its business voice anddata offerings along with expansion of distribution channels. In the voice offering, the Vodafone Wireless Office proposition - a solutionreducing the need for fixed line phones - has been enhanced with an increasedhandset range, superior call management software, a special tariff structure andavailability across a broader geography. At 30 September 2005, Vodafone WirelessOffice hit a significant milestone, achieving over one million customers acrossnine markets. Significant steps have been made in the area of data services. The VodafoneMobile Connect 3G/GPRS data card has now been rolled out across 19 markets,including three of the Group's associated companies and three Partner Markets.The product portfolio was enhanced in the period with the launch of a quad-banddata card allowing customers to connect whilst travelling in the US and a datacard supporting both GPRS and EDGE technology which provides high speedconnectivity in a number of the Group's Partner Markets. These data cards areavailable in an increasing number of distribution channels and with a growingrange of service and price bundles. Vodafone, Linksys and Cisco Systems announced the launch of the 3G/UMTS Routerin September 2005. The 3G/UMTS Router allows teams of up to five people, enabledwith wireless LAN capability already built in to most laptop computers, tosimultaneously access high speed mobile data services provided by the Group's 3Gnetworks. This extends the benefits of the Vodafone Mobile Connect propositionfrom individuals to teams. At 30 September 2005, the 3G/UMTS Router wasavailable in Italy and Spain and has since been introduced in a further threemarkets. In April 2005, the Group announced the roll out of push email, a serviceproviding real-time, secure and remote access to email, contacts and calendardirect to a range of business-focused mobile devices. During the launch phase,which will last until the end of this calendar year, the service will besupported by six devices, with additional devices introduced in the comingmonths. Meeting the needs of business customers for predictable pricing, Vodafone haslaunched a domestic data tariff with unlimited usage and a roaming data tariffbundled with large volumes of data. Domestic flat rate data tariffs have beenlaunched in most markets, including Germany, the Netherlands, Italy, Spain andthe UK. FINANCIAL UPDATE INCOME STATEMENT Investment income and Financing costs Six months to Six months to 30 September 30 September 2005 2004 £m £m Investment income 259 321 Financing costs (630) (556) ---------- ---------- (371) (235) ========== ========== Analysed as: - Net financing costs before dividends from investments (137) (132) - Potential interest charges arising on settlement of outstanding tax issues (124) (122) - Change in fair value of equity put option (151) - - Dividends from investments 41 19 ---------- ---------- (371) (235) ========== ========== Net financing costs before dividends from investments increased by 3.8% to £137million, with a 28% increase in average net debt compared to the six months to30 September 2004 partially offset by the benefit of a change in the currencymix of borrowings, an increase in the level of average cash balances held insterling and the repayment of fixed rate bonds in the year to 31 March 2005. Taxation Six months to Six months to 30 September 30 September 2005 2004 £m £m Tax on profit 1,289 857 Share of associated undertakings' tax 232 224 Tax items not related to underlying business performance: - Deferred tax asset recognised on shareholder and regulatory approval of the merger of Vodafone K.K. and Vodafone Holdings K.K. - 303 ---------- ---------- Adjusted tax on profit 1,521 1,384 ========== ========== Profit before tax 4,107 4,540 Less: Share of associated undertakings' non-operating income (19) - Items not related to underlying business performance: - Other income and expense 515 - - Non-operating income and expense (1) (16) - Change in fair value of equity put option 151 - ---------- ---------- Adjusted profit before tax 4,753 4,524 Add: Share of associated undertakings' tax and minority interest 250 248 ---------- ---------- Adjusted profit before tax for the purpose of calculating adjusted effective tax rate 5,003 4,772 ========== ========== Adjusted effective tax rate 30.4% 29.0% ========== ========== The adjusted effective tax rate for the six months to 30 September 2005, whichis based on the expected effective tax rate for the year ending 31 March 2006,is 30.4% compared to 29.0% for the prior period. The Group's effective tax rateis lower than the Group's weighted average tax rate of 35.0%, as a result of thebuy back of shares in Vodafone Italy and favourable tax settlements, but hasincreased compared to the comparable period as the prior period resultsbenefited from finalising the reorganisation of the Group's German operations. Earnings per share Adjusted earnings per share increased by 8.5% from 4.95 pence to 5.37 pence forthe six months to 30 September 2005. Basic earnings per share fell from 5.40pence to 4.36 pence for the current period. Adjusted earnings per share is stated before a charge of 0.24 pence per sharefor the change in fair value of equity put options, a further charge of 0.81pence per share in relation to an impairment of the carrying value of goodwillof Vodafone Sweden and a credit of 0.04 pence per share for other items notrelated to underlying business performance. In the six months to 30 September2004, adjusted earnings per share was stated before a credit of 0.45 pence pershare in relation to a deferred tax asset recognised on the approval of themerger of Group entities in Japan. Total shareholder returns The Company provides returns to shareholders through a combination of dividendsand share purchases. Dividends The Company has historically paid dividends semi-annually, with a regularinterim dividend in respect of the first six months of the financial yearpayable in February and a final dividend payable in August. The directors expectthat the Company will continue to pay dividends semi-annually. In considering the level of dividends, the Board takes account of the outlookfor earnings growth, operating cash flow generation, capital expenditurerequirements, acquisitions and divestments, together with the amount of debt andshare purchases. Accordingly, the directors have declared an interim dividend of2.20 pence per share, representing a 15% increase over last year's interimdividend. The Board has also indicated that it is targeting to achieve adividend pay-out ratio of 50% for the 2007 financial year, being the declaredinterim and proposed final dividends per share as a percentage of adjustedearnings per share. The pay-out ratio for the 2005 financial year was 42%. Aftertaking into account this target, it is the intention to grow future dividends on an annual basis in line with underlying earnings growth. The ex-dividend date is 23 November 2005 for ordinary shareholders, the recorddate for the interim dividend is 25 November 2005 and the dividend is payable on3 February 2006. Share purchases When considering how increased returns to shareholders can be provided in theform of share purchases, the Board reviews the free cash flow, anticipated cashrequirements, dividends, credit profile and gearing of the Group. The Board willcontinue to consider share purchase programmes, subject to the maintenance ofsingle A credit ratings. On 24 May 2005, the directors allocated £4.5 billion to the share purchaseprogramme for the year to March 2006. At the Company's Annual General Meeting("AGM") on 26 July 2005, the Company received shareholder approval to purchaseup to 6.4 billion shares through to the next AGM, expected to be held in July2006. Shares can be purchased on market on the London Stock Exchange at a pricenot exceeding 105% of the average middle market quotation for such shares on thefive business days prior to the date of purchase and otherwise in accordancewith the rules of the Financial Services Authority. Purchases are made only ifaccretive to earnings per share, excluding items not related to underlyingbusiness performance. The Board has decided to allocate a further £2 billion to the share purchaseprogramme for the year to March 2006, raising the total allocated for the yearto £6.5 billion. For the period from 1 April 2005 to 14 November 2005, theCompany purchased 2,407 million shares at a cost of £3.4 billion. In addition to ordinary market purchases, the Company has placed irrevocablepurchase instructions prior to the start of close periods and in advance ofquarterly KPI announcements. Share purchases since 1 April 2005 were as follows: Number of shares TotalPurchases made between purchased consideration (1) Purchase arrangements Million £ million 1 April and 23 May 2005 406 565 Irrevocable purchase instructions 24 May and 10 July 2005 764 1,049 Ordinary market purchases 11 July to 27 July 2005 225 325 Irrevocable purchase instructions 28 July to 30 September 2005 572 863 Ordinary market purchases ---------- ---------- 1 April to 30 September 2005 1,967 2,802 1 October and 14 November 2005 440 648 Irrevocable purchase instructions (1) Includes stamp duty and broker commissions For the period from 1 April 2005 to 30 September 2005, the average share pricepaid, excluding transaction costs, was 141.7 pence, compared with the averagevolume weighted price over the same period of 142.6 pence. Shares purchased areheld in treasury in accordance with section 162 of the Companies Act 1985. At 30September 2005, 5,517 million shares were held in treasury, which increased to5,943 million shares at 14 November 2005. Treasury shares The Companies Act 1985 permits companies to purchase their own shares out ofdistributable reserves and to hold shares with a nominal value not to exceed 10%of the nominal value of their issued share capital in treasury. If shares inexcess of this limit are purchased they must be cancelled. It is expected thatcancellations will commence in 2006. Whilst held in treasury no voting rights orpre-emption rights accrue and no dividends are paid in respect of treasuryshares. Treasury shares may be sold for cash; transferred (in certaincircumstances) for the purposes of an employee share scheme; or cancelled. Iftreasury shares are sold, such sales are deemed to be a new issue of shares andwill accordingly count towards the 5% of share capital which the Company ispermitted to issue on a non pre-emptive basis in any one year as approved by itsshareholders at the AGM. Distributable reserves are increased by the proceeds ofany sale of treasury shares up to the amount of the original purchase price,whereas no increase would arise from the sale of non-treasury shares. Any excessabove the original purchase price must be transferred to the share premiumaccount. Cash flows and funding During the six months to 30 September 2005, the Group increased its net cashinflow from operating activities by 4.4% to £6,084 million and generated £3,695million of free cash flow, as analysed in the following table: Six months to 30 September 2005 2004 £m £m % change Net cash inflow from operating activities 6,084 5,827 4.4 Add: Taxation 667 417 Net capital expenditure on intangible assets and property, plant and equipment (2,570) (2,515) 2.2 --------------------------------------------------------------------------------------------------------- Purchase of intangible fixed assets (252) (329) (23.4) Purchase of property, plant and equipment (2,328) (2,204) 5.6 Disposal of property, plant and equipment 10 18 (44.4) --------------------------------------------------------------------------------------------------------- ---------- ---------- Operating free cash flow 4,181 3,729 12.1 Taxation (667) (417) 60.0 Dividends received from associated undertakings (1) 375 947 (60.4) Dividends paid to minority interests in subsidiary undertakings (21) (18) 16.7 Net interest paid (173) (222) (22.1) --------------------------------------------------------------------------------------------------------- Dividends received from investments 41 18 127.8 Interest received 135 194 (30.4) Interest paid (345) (430) (19.8) Interest element of finance leases (4) (4) - --------------------------------------------------------------------------------------------------------- ---------- ---------- Free cash flow 3,695 4,019 (8.1) ========== ========== (1) Six months to 30 September 2005 includes £295 million (2004: £423 million) from the Group's interest in SFR and £79 million (2004: £447 million) from Verizon Wireless Free cash flow decreased primarily as a result of lower dividends received fromassociated undertakings, counterbalanced by an improved net cash inflow fromoperating activities. An analysis of net debt is as follows: At 30 September At 1 April 2005 2005 £m £m Cash and cash equivalents 1,400 3,769 Bank overdrafts (37) (43) ---------- ---------- 1,363 3,726 ---------- ---------- Trade and other receivables(1) 478 329 Short-term borrowings (1,989) (1,960) Long-term borrowings (13,945) (13,190) ---------- ---------- (15,456) (14,821) ---------- ---------- Net debt (14,093) (11,095) ========== ========== (1) Certain mark to market adjustments on financing instruments are included within trade and other receivables Reconciliation of movement in net debt: £m Net debt at 1 April 2005 (11,095) Change in net debt resulting from cash flows (2,190) Net debt acquired with subsidiary undertakings (570) Exchange differences (141) Other (97) ---------- Net debt at 30 September 2005 (14,093) ========== The Group remains committed to maintaining a solid credit profile, and followinga one notch upgrade in the long term credit rating from Standard & Poor inOctober 2005, holds ratings of P-1/F1/A-1 short term and A2/A/A+ long term fromMoody's, Fitch Ratings and Standard & Poor's, respectively. Credit ratings arenot a recommendation to purchase, hold or sell securities, in as much as ratingsdo not comment on market price or suitability for a particular investor, and aresubject to revision or withdrawal at any time by the assigning ratingorganisation. Each rating should be evaluated independently. In aggregate, the Group has committed facilities of approximately £7,206million, of which £5,842 million was undrawn at 30 September 2005. The undrawnfacilities include a $4.7 billion Revolving Credit Facility that matures in June2012 and a $5.5 billion Revolving Credit Facility that matures in June 2009.Both facilities support US and Euro commercial paper programmes of up to $15billion and £5 billion respectively and both facilities were undrawn at 30September 2005. In addition, the Group has a Y600 billion shelf programme inJapan, though no bonds have been issued under this programme. Other undrawnfacilities of £64 million are specific to the Group's subsidiary in Egypt. On 8 August 2005, $750 million of bonds due on 15 September 2015 were issuedunder the US shelf programme and on 8 September 2005, £350 million of bonds dueon 8 September 2014 were issued under the Medium Term Note programme. Following the acquisition of MobiFon S.A. ("MobiFon") and its parent company,MobiFon Holdings B.V., from Telesystem International Wireless Inc. ("TIW") ofCanada on 31 May 2005, the Group acquired additional capital market debt with anominal value of $223 million. Under a tender offer, which expired on 6 July2005, MobiFon Holdings B.V. repurchased and cancelled bonds with a nominal valueof $16 million for consideration of $20 million, which included $1 million ofaccrued interest. As a result of the acquisition of Oskar Mobil a.s, from TIW on 31 May 2005, theGroup acquired additional capital market debt with a nominal value of €325million and drawn credit facilities of CZK3.6 billion and €22 million. The bondswere redeemed on 7 and 8 July 2005 for a total consideration of €378 million,including accrued interest of €6 million. Credit facilities of €141 million wererepaid and cancelled on 30 June 2005. On 19 April 2005, the Board of directors of Vodafone Italy approved a proposalto buy back issued and outstanding shares for approximately €7.9 billion (£5.4billion), which was subsequently approved by the shareholders of VodafoneItaly. The buy back took place in two tranches, the first occurred on 24 June2005 and the second on 7 November 2005. As a result, Vodafone received €6.1billion (£4.2 billion) and Verizon Communications Inc. received €1.8 billion(£1.2 billion). After the transaction, Vodafone and Verizon Communications Inc.shareholdings in Vodafone Italy remained at approximately 77% and23%, respectively. SIGNIFICANT TRANSACTIONS The Group invested a net £1,887 million(1) in acquisition and disposalactivities, including the purchase and disposal of investments, in the sixmonths to 30 September 2005 and an analysis of the significant transactions andthe increases to the Group's effective interest in the entities is shown below: £m Acquisitions(1): Czech Republic (nil to 99.9%) and Romania (20.1% to approximately 100%) 1,840 Other acquisitions, including investments 48 Disposals: Other disposals, including investments (1) ---------- 1,887 ========== (1) Figure is shown net of cash and cash equivalents acquired of £70 million On 31 May 2005, the Group acquired approximately 79.0% of the share capital ofMobiFon S.A. in Romania, increasing the Group's ownership of MobiFon toapproximately 99.1%. At the same time, the Group also acquired 99.9% of theissued share capital of Oskar Mobil a.s. in the Czech Republic for a cashconsideration of approximately $3.5 billion (£1.9 billion) satisfied from theGroup's cash resources. In addition, Vodafone assumed approximately $0.9 billion(£0.5 billion) of net debt. The remaining 0.9% of MobiFon was acquired in aseparate transaction in the period. Details of transactions announced after 30 September 2005 are provided on page44. This information is provided by RNS The company news service from the London Stock Exchange

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