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Vodafone Unveils New Strategy

Vodafone sets out five key strategic objectives

May 30, 2006

8 Min Read

NEWBURY, U.K. -- Vodafone today sets out five key strategic objectives, which have beendeveloped in the context of the changing landscape in the mobile industryand which draw on the Group's strengths. Notable changes in the environmentinclude customers increasingly seeking products and services which meettheir total communications needs, a greater desire for simplicity and value,the emergence of new technologies, intensifying price competition andregulatory pressure. The objectives also reflect the differing growth ratesthat Vodafone is experiencing in different regions of the world. The fivestrategic objectives are:

  • Reduce costs and stimulate revenues in Europe

  • Deliver strong growth in emerging markets

  • Innovate and deliver on customers' total communications needs

  • Actively manage the portfolio to maximise returns

  • Align capital structure and shareholder returns policy to strategy

To recognise the different areas of focus throughout the business, aspreviously announced, Vodafone has organised its operations around threeprincipal business units:

  • Europe, headed by Bill Morrow, and including all of Vodafone's WesternEuropean controlled businesses

  • Eastern Europe, Middle East, Africa, Asia Pacific and affiliates("EMAPA"), headed by Paul Donovan, containing all of Vodafone's otherbusinesses, including its emerging market portfolio

  • New Businesses, headed by Thomas Geitner, with responsibility for thedelivery of new communication services which address the converging areas ofmobile, broadband and the internet.

Today Vodafone is outlining its approach to deliver on these five keystrategic objectives in a series of presentations.

Cost reduction and revenue stimulation in Europe The key areas of focus forthe Europe region will be cost reduction and revenue stimulation, reflectinga more mature mobile marketplace.

In driving cost reduction, Vodafone will build on its existing One Vodafoneprogramme, in addition to implementing further methods of reducing its costsincluding outsourcing, advancing its shared services efforts and reducingoverheads. In line with this approach, Vodafone has taken the decision tooutsource its IT Application Development and Maintenance activities withlikely savings of approximately 25-30% within 3 to 5 years against currentannual costs of £560 million.

Further initiatives include the centralisation of Network Supply ChainManagement activities, with expected savings of 8% within 2 years, against a£3.3 billion annual external spend today. Also, Vodafone's regionalconsolidation of its data centres is expected to provide savings of 25-30%within 3-5 years, against a £320 million annual cost today.

Group overheads will also be reduced, resulting in operating expendituresavings and an expected reduction of more than 400 positions in thecorporate centre and ensuring an appropriate balance between Group and localmanagement of activities.

Regarding revenue stimulation, Vodafone aims to drive additional usage ofvoice and data services within its existing, sizable European base ofcustomers. A variety of services are currently being rolled out as part ofthis effort, with high value customers being migrated from prepaid tocontract plans, the introduction of "family plans" designed to stimulategreater usage, greater promotion of its Vodafone Passport roaming plans andthe introduction of tariffs which encourage customers to utilise theirmobile devices more extensively within their home and/or office.

Deliver strong growth in emerging markets Emerging markets are expected togenerate an increasing proportion of Vodafone's growth in the next fewyears. Mobile penetration remains low in many fast growing emergingeconomies.

Vodafone has targeted significant growth in these markets and outperformanceagainst the original business cases for recent acquisitions. In itsrestructuring announcement, Vodafone highlighted the benefits ofestablishing a dedicated business unit focused on capturing growth in thesemarkets. Vodafone will today highlight the robust performance of itsemerging market portfolio with its continued strong growth profile.

Innovate and deliver on our customers' total communications needs In thecontext of changing customer requirements and the growing convergence ofmobile, broadband and the internet, Vodafone's third strategy objective willbe to innovate and deliver on customers' total communications needs. A thirdbusiness unit, "New Businesses" has been established to lead this effort.

Vodafone's New Businesses unit will focus initially on three streams ofactivity, which together will be known as "Mobile Plus" and will allowVodafone to target new sources of revenue. The first stream is focused onextending Vodafone's service offerings in the home and at the office to meetcustomers' growing voice and broadband data service needs, including theprovision of DSL. Vodafone Germany has today announced that it will launchbundled homezone products with DSL access provided by Arcor, in the thirdquarter of the current financial year. The second stream is focused on theintegration of the mobile, PC and the internet at the application level,offering seamless interoperability of services. The third area of focusseeks to introduce advertising based services and business models thatcustomers will view as the most appealing and acceptable.

Vodafone believes that its mobile centric approach in satisfying customers'total communications needs will deliver competitive advantage in themarketplace as it focuses on customers' two basic preferences - for mobilityand personalisation. Vodafone has already launched initial offerings in thisarea including Vodafone Zuhause in Germany and Vodafone Casa in Italy, whichfeature attractive homezone calling and data services. Further services willbe introduced over time. Vodafone Mobile Plus offerings will benefit fromthe upgrade of Vodafone's 3G networks to HSDPA, which features greatercapacity and higher data rates, the availability of complementary newbroadband technologies including DSL and the opportunities for servicecreation based on IP technology.

Actively manage Vodafone's portfolio to maximise returns Vodafone will seekto optimise its portfolio of assets, either disposing of assets where itbelieves it cannot earn a superior return or investing in businesses whereit believes it can create substantial additional value for shareholders.

Vodafone envisages a lower level of merger and acquisition activity in thefuture. Where value adding opportunities arise to acquire mobile assets,strict criteria will be applied. Firstly, targeted businesses shouldconsolidate Vodafone's presence in a local or regional market. Second, a clear path to control will need to be identified.

In addition, any acquisition must deliver an Investment Rate of Returnexceeding the local, risk adjusted, cost of capital by at least 200 basispoints and the return on invested capital should exceed the local, riskadjusted, cost of capital within 3 to 5 years.

Align capital structure and shareholder returns policy to strategy Some ofVodafone's businesses have entered a more mature phase, while several othersare still exhibiting high growth. The Group will focus its operationalexecution based on the different profiles of its businesses. Consequently,financial policies have been set to reflect the balance of mature and growthbusinesses within the Group.

As a result, Vodafone today announced an increased, 60% dividend payout ofadjusted earnings per share for FY05/06. Vodafone will continue to target a60% payout in the future, with increases in dividends linked to the increasein its underlying earnings per share. Vodafone has also announced that it istargeting a low Single A credit rating as it aligns its capital structure toits evolved strategy. The result is that Vodafone is announcing a furtherone time, £3 billion return to shareholders, which will be combined with theexisting £6 billion return announced as a result of the sale of its Japanesebusiness. This combined £9 billion will be returned to shareholders via a BShare scheme and associated share consolidation in August 2006. As a resultof this one time return and the new target credit rating, Vodafone has nocurrent plans for further share purchases or other one-off returns toshareholders.

Financial impact

As a result of focusing on its five key strategic objectives, Vodafoneanticipates the financial impact will be as follows:

  • In the Europe Region, Vodafone is targeting modest revenue growth over themedium term. As a result of its cost reduction initiatives, Vodafone istargeting flat operating expenditures in FY07/08 versus FY05/06. The neteffect of this is that EBITDA margins are expected to decline slightly.However, with a capital expenditure-to-sales ratio of 10% in FY07/08,Vodafone continues to expect the Europe Region to generate considerableamounts of operating free cash flow.

  • In the EMAPA region, Vodafone expects to see continued strong top linegrowth for several years with EBITDA margins being broadly stable asincreased investments in customer growth are largely offset by scaleefficiencies. The capital expenditure to sales ratio is expected toinitially remain above 10%, although it is expected to trend towards 10% inthe medium to long term.

  • In the New Businesses area, Vodafone anticipates that its Mobile Plusstrategy will account for approximately 10% of Group revenues in three tofour years. Given an "infrastructure-light" approach, Vodafone expectsmodest levels of investment over the medium term.

Vodafone is now targeting outperformance on its original One Vodafoneplans:

  • Vodafone will continue through FY07/08 to measure the revenue performanceof its key European operations by reference to targeting 1% revenue marketshare outperformance compared to principal competitors.

  • With regards to costs, Vodafone previously committed to the combined capexand opex expenses being at around FY03/04 levels in FY07/08 for the 16 OneVodafone operations. Vodafone has decided to split out the capex and opextarget into two separate parts for the Europe Region. The Europe Region accounts for over 85% of the remaining One Vodafone costbase and is therefore a logical evolution of its previous target.

  • The updated targets for the European Region are, therefore, to holdFY07/08 opex flat against the FY05/06 results and, therefore, avoid afurther £150-200million of future increases. Additionally, Vodafone willcontinue to target a 10% capex-to-sales efficiency, the result of which isthat Vodafone expects to reduce FY07/08 capex by between £400-£500 millionwhen compared to the current year.

Commenting on today's announcement, Arun Sarin said:

"Vodafone has a strong market position, outperforming its principalcompetitors. However we have been reviewing our strategy, given ourcontinuing desire to meet our customers' changing requirements. I amencouraged by the opportunity to broaden our range of services for ourcustomers and our more focused efforts to drive cost reduction and revenuestimulation in Europe, while we capitalise on growth opportunities in ouremerging market businesses. I believe we are well positioned to continue oursuccess in a changing environment."

Vodafone Group plc (NYSE: VOD)

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