Vodafone - Q3 FY21 trading update

Operating review ⫶ Maintaining commercial momentum during lockdowns

During the quarter, we continued to make progress against our strategic priorities to deepen engagement with our customers, accelerate our transformation to a digital first organisation, improve the utilisation of our assets, and optimise our portfolio.

1. Including VodafoneZiggo | 2. Q3 FY20 excludes inactive SIM impact in Italy | 3. Africa including Safaricom, Ghana & Egypt | 4. Germany, Italy, UK and Spain only

In Consumer, we are competing effectively across all market segments, with speed-tiered unlimited mobile data plans driving ARPU accretion at the high end, and with second brands in the value segment. We now have 10 million active unlimited mobile data customers across 10 markets. In fixed broadband, there has been strong demand for high-speed connectivity, with over 1.1 million NGN broadband customers added in Europe year-to-date, taking our total NGN broadband base to 22.6 million.

In Business, we have continued to provide SME, large, multi-national and public sector customers with a full suite of next-generation connectivity services in order to keep them connected. Service revenue grew 0.7%* (Q2: -0.2%*) and we added a record six million IoT SIM connections. During the quarter, we announced a strategic partnership with RingCentral and will be launching a joint cloud-based Unified Communications as a Service solution in 2021. We also announced the first Multi-access Edge Computing pilots in Europe, in partnership with Amazon Web Services Wavelength. We will share further insight into Vodafone Business with a virtual investor briefing and live Q&A session hosted by Vinod Kumar (Vodafone Business CEO) on 18 March 2021.

Our investments in digital platforms have led to an increasing share of digital sales, with 50% of new iPhone sales in the UK completed digitally. The MyVodafone app has helped us stay connected with our customers; the app now has 40 million unique customers and receives 500 million visits per month. In January, we announced a new long-term, multi-platform agreement with Discovery, Inc, under which approximately 100 million Vodafone customers in Europe will be able to enjoy Discovery's unique content portfolio across TV and streaming services.

We have continued to improve our asset utilisation through network sharing. During the quarter, Vodafone Germany signed a Memorandum of Understanding with Telefonica Deutschland, outlining a proposed reciprocal network sharing agreement to improve 4G coverage in areas where only one party operates ('grey spots'). 

In December 2020, Vodafone's wholly owned subsidiary, Vodafone Vierte Verwaltungs AG, announced a settlement with three minority shareholders and launched a tender offer to the remaining shareholders of Kabel Deutschland Holding AG ('KDG'). Through irrevocable undertakings with three minority KDG shareholders, Vodafone will own at least 93.8% of the outstanding share capital of KDG following completion of the offer. The transaction will be immediately accretive for both Adjusted EPS and Free Cash Flow per share and will be neutral to our credit rating.

The Vantage Towers IPO remains on track and the team will present its Q3 trading update on 15 February 2021.

Our Purpose ⫶ We connect for a better future

We believe that Vodafone has a significant role to play in building a digital society that enhances socio-economic progress, embraces everyone and does not come at the cost of the planet. Our sustainable business strategy helps deliver our 2025 targets across three pillars: Digital Society; Inclusion for All; and Planet.

Our significant role has become even more evident during the COVID-19 pandemic, as our essential network infrastructure has been critical in enabling people to work, allowing businesses to remain operational, supporting emergency services and giving access to education. Through our essential network infrastructure, we have kept people and societies connected. We have also donated over €150 million to support those affected by the crisis through direct contributions and services in-kind, supporting millions of our customers, frontline workers and citizens. The Vodafone Foundation has also donated €10 million to local charities in our markets in the form of cash grants, gifts in-kind and from employee donations via the community fund.

In November 2020, we announced a further update with respect to our long-term ambition to minimise our environmental impact. We have committed to reducing our total global carbon emissions to 'net zero' by 2040 and confirmed that our 2030 carbon reduction targets have been approved by the Science Based Targets initiative. Our targets are in line with reductions required to keep warming to 1.5°C, the most ambitious goal of the Paris Agreement.

This builds on a commitment we made in July 2020 to power 100% of our European network with renewable electricity by July 2021, creating a 'Green Gigabit Net' for customers across 11 markets that will grow sustainably using only power from wind, solar or hydro sources. Our accelerated shift to 100% renewable electricity on our European network will also help our customers reduce their carbon emissions, particularly our Business customers, while helping to create a healthier planet for everyone. By the end of December 2020, Germany, Italy and three of our Other Europe markets were already procuring 100% of their electricity from renewable sources.

In December 2020, we were recognised by global environmental non-profit organisation CDP for our actions and transparency with respect to our environmental impact and secured a place on CDP's prestigious climate change 'A List'. This places us in the top 5% of companies that responded to CDP's 2020 climate change questionnaire.

Performance review ⫶ Return to growth, supported by Germany

·   Resilient trading performance, with service revenue growth of 0.4%* (Q2: -0.4%*)

·   Continued commercial momentum, despite further lockdown measures

·   Germany service revenue growth of 1.0%* (Q2: -0.1%*), with growth across all segments in the market

·  Reaffirming FY21 guidance with Adjusted EBITDA expected to be between €14.4 - €14.6 billion and free cash flow of at least €5 billion (pre-spectrum and restructuring)

Notes:

1. See pages 9 to 11 for a full disaggregation of our financial results by geography, including intersegment eliminations.  

2. Service revenue and organic growth are alternative performance measures. See page 8 for further details.

Further geographic performance information is available as a spreadsheet at investors.vodafone.com/reports-information/results-reports-presentations

Germany ⫶ Consistent commercial performance, with growth across all segments

Service revenue grew by 1.0%* (Q2: -0.1%*), with growth across all segments in the quarter. This was driven by our consistent commercial performance, higher variable usage during the COVID-19 lockdown, a strong performance in Business and a smaller decline in roaming and visitor revenue. The year-on-year impact from the decline in roaming and visitor revenue was -1.0 percentage points in Q3 (Q2: -1.1 percentage points). Retail service revenue grew by 1.5%* (Q2: +0.6%*).

Fixed service revenue grew by 1.4%* (Q2: +0.6%*), driven by customer base growth and ARPU accretive customer upgrades to higher-speed plans, supported by higher variable usage during the pandemic lockdown. We added 98,000 cable broadband customers in Q3, including 35,000 migrations from legacy broadband DSL. A quarter of our cable broadband customer base now subscribes to speeds of at least 400Mbps, and Gigabit speeds are now available to 22.3 million households on our cable broadband network. Our broadband customer base increased by 56,000 to 10.9 million despite our retail stores being closed in December due to the COVID-19 pandemic.

Our TV customer base declined by 75,000, in part reflecting the termination of a bulk contract. We launched the 'DAZN' pay-TV channel and our new Apple set-top box product during the quarter, which are beginning to support an improved premium TV performance. However, retail sales activity was impacted by the December lockdown in response to the COVID-19 pandemic. Our converged 'GigaKombi' proposition, which allows customers to combine their mobile, landline, broadband and TV subscriptions for one monthly fee, continued to grow, with 28,000 Consumer additions in the quarter. We now have over 1.6 million Consumer converged accounts.

Mobile service revenue increased by 0.5%* (Q2: -1.0%*), with the improvement driven by higher variable usage, increased demand from business customers, and a smaller impact from the decline in roaming and visitor revenue, partially offset by lower prepaid revenue. We added 99,000 contract customers in Q3 despite the lockdown, supported by strong Consumer and public sector demand. Contract churn improved by 1.0 percentage points year-on-year to 12.0%. We added 122,000 prepaid customers, supported by our online-only proposition 'CallYa Digital'.

Italy, UK, Spain and Other Europe ⫶ Lower COVID impacts, with stable underlying performance

Italy

Service revenue declined by 7.8%* (Q2: -8.0%*) reflecting continued price competition in the low-value segment of the mobile market and lower roaming and visitor revenue. The year-on-year impact from the decline in roaming and visitor revenue was -1.9 percentage points in Q3 (Q2: -2.4 percentage points).

Market net mobile number portability ('MNP') volumes fell as a result of local lockdowns during the quarter. Our second brand 'ho.' continued to grow strongly and now has 2.4 million customers. During the year, we signed mobile wholesale agreements with PostePay and Digi, and we will begin to migrate these customers onto our network in Q4.

Fixed service revenue grew by 1.1%* (Q2: +4.8%), with the quarterly slowdown driven by the lapping of prior year price increases. In fixed, we added 13,000 customers to our broadband customer base and we now have almost three million broadband customers. Through our own next generation network and strategic partnership with Open Fiber, our broadband services are now available to 8.3 million households. We also cover nearly three million other households with fixed-wireless access.

UK

Service revenue decreased by 0.4%* (Q2: -0.5%*) as continued good commercial momentum in our Consumer and Business segments was offset by the impact from the decline in roaming and visitor revenue of -2.3 percentage points (Q2: -2.8 percentage points).

Our mobile contract customer base increased by 77,000 driven by strong iPhone demand in Consumer and higher contract customer loyalty, with churn declining by 0.4 percentage points year-on-year to 14.4%. Our digital second brand 'VOXI' continued to grow, with 52,000 customer additions during Q3, supported by the launch of our 'endless video' proposition.

We had a good performance in fixed broadband, despite increased promotional activity during the Black Friday period, with 38,000 net customer additions. We now have 876,000 broadband customers, of which 450,000 are converged customers. Business demand for our SME and corporate products remained strong, including for our virtual call centres and our productivity and security solutions, supported by our best-in-class Business net promoter scores.

To support our continued investment in our networks, products and services, we announced that annual price increases of Consumer Price Index plus 3.9% will be applied to all broadband and mobile contracts signed from 9 December 2020, taking effect from April 2021.

During the quarter we also launched our 'schools.connected' programme with a goal of helping disadvantaged school children access education from home. We have provided 350,000 free SIMs to schools and further education colleges since the launch in November.

In December 2020, we announced that the CEO of Vodafone UK, Nick Jeffery, would leave in February 2021 to take up a new position outside Vodafone. We have announced that Ahmed Essam will become the new CEO of Vodafone UK effective 1 February and will remain on the Vodafone Group Executive Committee. Ahmed joined Vodafone in 1999 and has held a range of leadership roles across the Group, most recently as Group Chief Commercial Operations and Strategy Officer.

In January 2021, we announced the commercialisation of Cornerstone, the 50:50 joint venture between Vodafone and Telefonica ('TEF UK') that owns and manages both operators' passive tower infrastructure in the UK. Vodafone UK and TEF UK have each entered into long-term Master Services Agreements with Cornerstone. To facilitate the effective roll-out of 5G technology and meet coverage obligations, Vodafone UK and TEF UK have agreed to commit as anchor tenants on c.1,200 new macro sites to be constructed by Cornerstone and c.1,950 new passive tenancies on existing macro sites operated by Cornerstone. Vodafone transferred its 50% shareholding in Cornerstone to Vantage Towers on 14 January 2021.