Vodafone Group Plc's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Vodafone Group plc (VOD)

Q3 2012 Earnings Call

February 09, 2012 4:30 am ET

Executives

Vittorio Colao - Chief Executive Officer, Executive Director and Chairman of Executive Committee

Andrew N. Halford - Chief Financial Officer and Member of Executive Committee

Michel Combes - Executive Director, Member of Executive Committee and Chief Executive of Europe Region Operations

Nicholas Jonathan Read - Chief Executive Officer of Asia-Pacific & Middle East Region

Analysts

Timothy Boddy - Goldman Sachs Group Inc., Research Division

Akhil Dattani - JP Morgan Chase & Co, Research Division

Nick Delfas - Morgan Stanley, Research Division

Justin Funnell - Crédit Suisse AG, Research Division

Nick Lyall - UBS Investment Bank, Research Division

Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division

Simon Weeden - Citigroup Inc, Research Division

James Britton - Nomura Securities Co. Ltd., Research Division

Robert Grindle - Deutsche Bank AG, Research Division

Ottavio Adorisio - Societe Generale Cross Asset Research

Andrew Beale - Arete Research Services LLP

Stephen Howard - HSBC, Research Division

James Ratzer - New Street Research LLP

Guy R. Peddy - Macquarie Research

Maurice Patrick - Barclays Capital, Research Division

Jeremy A. Dellis - Jefferies & Company, Inc., Research Division

John Karidis - Oriel Securities Ltd., Research Division

Paul Marsch - Berenberg Bank, Research Division

John Davies - ING Groep N.V., Research Division

Presentation

Operator

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[indiscernible] ladies and gentlemen, and welcome to the Vodafone Group Third Quarter IMS Conference Call. Today's call is hosted by Vittorio Colao, CEO of the Vodafone Group. Please go ahead, Mr. Colao.

Vittorio Colao

Thank you, operator. Good morning, and thank you all for joining Vodafone's Interim Management Statement Call for the third quarter ended in December. I'm here with Andy Halford, Nick Read and Michel Combes.

I will start with few highlights on the quarter before passing to Andy who will take you through all the operating companies and then I will summarize, and we'll then open to questions.

So let me start on Slide 3, highlights of the quarter. Group service revenue grew 0.9%, which is just over 3% excluding MTRs. This growth is less than the previous quarter, reflecting difficult conditions in a number of our European markets, offset by strong momentum from our AMAP regions and continued growth from operations in Northern Europe. In this context, we continue to deliver, in our strategic growth areas, the 3 areas of data, enterprise and emerging markets.

Data, specifically, grew 21.8%, led by the increasing smartphone penetration, which is now over 24% in Europe. Enterprise growth of 0.8% was a little slower than the previous quarter due to competitive and macroeconomic pressures in voice, but we still see a healthy and growing demand for enterprise data services.

And we continue to generate strong cash flows. Today, we report GBP 1.5 billion free cash flow for the quarter. We are now over halfway through the GBP 4 billion SFR buyback program and over 70% complete against our GBP 6.8 billion commitment. And finally today, we confirm our guidance for the '11/'12 fiscal year.

So we can move to Slide 4. Here you can see our regional performance for the quarter. Europe declined 1.7% on a reported basis. However, once we remove the impact of regulated voice termination rate cuts, Europe grew 1%. Some of our markets in Southern Europe remain very challenging, as I said. And particularly, we saw a deterioration of trends in Italy, which Andy will cover a little bit later.

On the other hand, AMAP grew 7.6% on a reported basis, which would be 8.8% excluding voice MTR cuts, with momentum coming from 20% growth in India, 80% growth in Vodacom and not mentioned on the chart, but still worth mentioning, an excess of 30% in Ghana, which is small but we are proud of.

I have mentioned the growth of 21.8% in data. We also saw growth in messaging of 4.3% and 3.9% from our fixed operation. All of these offset the ongoing decline in voice. CapEx and free cash flow for the quarter were both at GBP 1.5 billion, which Andy, again, will explore a little later. Net debt of GBP 25.5 billion includes the Polkomtel disposal proceeds of GBP 0.8 billion and the spectrum spend in Italy and Greece.

So moving to Slide 5. We can take a closer look at underlying service revenue -- service revenues. Here you see the reported service revenue growth in the gray bars and the red show the revenue growth of our business when we exclude the regulated voice termination rate cuts, which continue to have a significant impact on our business. In the third quarter, this regulatory impact represented, as you can see on the right part of the chart, 2.2 percentage points of lower growth for the group, giving us an underlying growth of 3.1% instead of the 0.9% reported. Of course, this also partially reduced our costs.

During the quarter, we saw incremental voice MTR cuts in the Netherlands and in New Zealand, and we also lapped for one month the large MTR cut in Germany, which happened last year and boosted Germany a little bit in Q3.

Now if we go to Slide 6, here we have the drivers of our service revenue growth. You can see from this chart the loss in voice revenues, which is the first 2 gray bars. Of these, 75% comes from regulation and this was more than offset by the growth in data and messaging, which is shown in the next 2 blocks in blue. Our data revenue grew 21.8% in the quarter, as I said, driven by the introduction of integrated tariffs, increasing smartphone penetration and growth of over 50% in mobile Internet revenues. On an annualized basis, data is now a GBP 6.3 billion business and represents 15% of group service revenues.

Messaging revenue grew 4.3% in the quarter, a little lower than last quarter, but still very strong demand. The growth in messaging volumes and revenues was impacted this quarter by the limit on data SMS, which was introduced by the regulator in India. I will talk a little later about our progress and the move towards integrated tariffs, which, of course, offers us some protection from changing customer behaviors on the messaging front.

Fixed revenues grew 3.9%. It's down a little compared to the previous quarter with growth slowing in Germany and in Italy.

I will now pass to Andy to go through the detailed financial review.

Andrew N. Halford

Thank you, Vittorio, and good morning. Let me start by giving you a bit more color on the trends we saw in Europe during the quarter. Service revenues declined 1.7%. While excluding MTRs, they grew by 1.0%. Performance in Europe continues to see a north-south divide with the weak consumer and economic environments in our Southern European operations offsetting the growth from the U.K., Germany, Netherlands and especially in Turkey. In particular, we saw a deterioration of consumer trends in Italy during the quarter and conditions in Spain remain very tough.

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