Vodafone H1 Beats Expectations

Global operator's figures are on the rise for the first half of financial year, but charges still leave it £4.3B in the red

November 12, 2002

41 Min Read

NEWBURY, U.K. -- Vodafone Group Plc has announced its interim financial results for the first half of its financial year to September 30. The company notes an excellent first half operating performance, with expectations exceeded on key growth indicators.It generated £2.9 billion in free cash flow.

  • Turnover increased 67% to £14,898 million, benefiting from the inclusion of results from the Group’sJapanese operations, with data revenues increasing by 112% to £1,701 million. Proportionateturnover increased 15% to £16,517 million.

  • Increase of over 12% in proportionate registered customer base since 30 September 2001 to107.5 million.

  • Profit on ordinary activities before taxation, before goodwill amortisation of £6,837 million andnet exceptional non-operating income of £267 million, increased by 41% to £4,250 million.

  • Earnings per ordinary share, before goodwill amortisation and exceptional items, increased by31% to 3.28 pence.

  • Loss for the financial period improved by £5,399 million to £4,336 million.

  • Dividend increase doubled to 10%.

  • Group EBITDA, before exceptional items, increased by 68% to £5,566 million. ProportionateEBITDA, before exceptional items, increased by 30% to £6,203 million.

  • Free cash flow of £2,878 million, after investing £2,705 million on tangible capital expenditure. Netdebt reduced to £10,697 million.Sir Christopher Gent, Chief Executive of Vodafone Group Plc, commented:
    “The results show Vodafone has exceeded market expectations on key growth indicators with good turnovergrowth and excellent improvements in margins leading to very strong free cash flow generation. We are makingthe transition to the new growth environment enabled by our new data services, with a better financialperformance than expected. We expect to achieve good year on year growth on key performance parametersand are very confident in the future prospects for our business.”Julian Horn-Smith, Group Chief Operating Officer, commented:
    “We have delivered an excellent first half operating performance reflecting the fundamental strength of thebusiness. The improvements in ARPU, margins and cash flows demonstrate our focus on growing a high qualitycustomer base, promoting new and existing services and driving operational efficiency throughout the Group.Our new customer propositions, together with our strong brand, create a compelling platform on which toachieve our future growth objectives.”Operational performance

  • Real improvement in ARPU in some of our key markets, driven by increased voice and data usage andimproved customer mix and activity levels. Active customers represent 94% of the total registeredproportionate customer base, compared with 92% at 31 March 2002 and 90% at 30 September 2001.

  • Non-voice service revenues up in the Group’s controlled mobile businesses to 13.2% of total servicerevenues for the twelve month period to 30 September 2002, compared with 11.1% for the year ended 31March 2002. In Japan, data revenues exceeded 20% of service revenues during August and September.

  • The Group’s mobile business proportionate EBITDA margin improved by 3.6 percentage points to 39.0%.Mobile EBITDA margin in Japan increased from 20.5% to 32.0%.

  • Organic net customer additions of over 9.4 million in the twelve month period ended 30 September 2002.Worldwide customer base of 107.5 million proportionate registered customers at 30 September 2002,representing growth of 12.5% since 30 September 2001. Venture registered customer base over 273 million.

  • Free cash flow of £2,878 million, exceeding the amount generated for the whole of the previous financialyear. Operating cash flow increased 56% over the comparable period to £5,676 million.

  • Tangible capital expenditure of £2,705 million. The Group expects this number to increase to over £5,500million for the full year, 8% below previous forecast of £6,000 million.Commercial initiatives

  • European launch of Vodafone live!, Vodafone’s consumer service, which provides colour mobile servicesthrough a Vodafone-branded easy to use menu on integrated camera-phones. Vodafone customers can nowaccess picture messaging, downloadable games and ringtones and all the latest entertainment andinformation.

  • Imminent launch of the first product from Vodafone’s business proposition, Vodafone Mobile Office, called“Vodafone Remote Access”, which will offer a pan-European Vodafone-branded solution for secure remoteconnection of laptops to a corporate network using a Vodafone-enabled GPRS data card and customisedsoftware.

  • Launch of new services, including prepaid top-ups, allowing customers to top-up their prepaid mobile phoneswhen travelling abroad and Eurocall Platinum, building on the success of Vodafone’s single rate Europeanprice plan, Eurocall. Eurocall Platinum is aimed at high-usage business travellers in Europe. Launch ofGPRS roaming enabling seamless access to Vodafone live! and Vodafone Remote Access across Vodafoneand Vodafone’s partner networks.

  • Success of brand rollout programme and advertising campaigns has created increased brand recognition andawareness, supporting the rollout of Vodafone-branded services, increasing usage and customer loyalty andattracting other mobile operators through the Partner Network programme.Transactions

  • Agreement reached with BT and SBC to purchase their respective 26% and 15% interests in the Frenchtelecommunications operator Cegetel, the controlling shareholder of the French mobile operator SFR, for anaggregate cash consideration of €6.3 billion. Both acquisitions are subject to pre-emption rights held byVivendi. Non-binding cash offer of €6.8 billion made to Vivendi for its 44% interest in Cegetel rejected by theBoard of Vivendi on 29 October 2002, with the offer subsequently lapsing. Same offer renewed to last for theduration of the twenty-day pre-emption period ending on 10 December 2002. Until such time as the offer isformally accepted by Vivendi, the Group reserves the right to withdraw its offer at any time.

  • Acquisition of additional minority stakes in the Group’s subsidiaries in Germany, Spain, Sweden, Portugaland Australia, for a total cash consideration of £899 million.

  • Further investment of US$750 million in China Mobile, increasing interest to approximately 3.27%.

  • Acquisition of remaining 50% stake in Vizzavi for €143 million.

  • Disposal of remaining stake in Arcor’s Telematik business and stake in Bergemann GmbH, through which theGroup held an effective 8.2% stake in Ruhrgas AG, realising cash proceeds of approximately €1 billion.BUSINESS REVIEW
    The Group has continued to perform strongly in the period as it has continued to focus on revenue growth andmargin improvement. The emphasis has been on attracting, servicing and retaining high value customers andthe provision of new products and services.Statutory turnover
    The Group’s statutory turnover increased by £5,992m to £14,898m for the six months ended 30 September2002 from £8,906m for the six months ended 30 September 2001. Growth in turnover from existing operationswas £1,244m, representing an increase of 14%, and growth in respect of acquired businesses was £4,748m,comprising J-Phone Vodafone (£3,731m) and Japan Telecom (£1,017m), both of which became subsidiariesand therefore were consolidated in the second half of the 2002 financial year.Turnover increased as a result of the increased average customer base and improved levels of usage,although this was partly offset by reductions in call termination rates in certain of the Group’s markets.Compared with the twelve month period ended 31 March 2002, ARPU for the twelve months ended 30September 2002 improved in Germany and the UK as a result of a combination of these factors together withincreased levels of customer base activity resulting from expected disconnections from the customer base.Mobile data revenues also increased and made a significant contribution to overall turnover growth and ARPUimprovements and, at £1,701m, data accounted for 13.2% of service revenues in the Group’s controlled mobilesubsidiaries for the twelve months ended 30 September 2002, compared with 11.1% for the 2002 financialyear. SMS revenues continue to represent the principal component of data revenues and the increase reflectsboth increases in usage per customer and penetration of the service into the customer base. In addition,Japan has continued to develop its data and content service offerings, contributing to an increase in datarevenues which, for the last two months, represented over 20% of service revenues. The Group is expectingto further grow non-voice service revenues through its Vodafone live! and Vodafone Mobile Office serviceofferings.Expenses
    Consolidated cost of sales increased from £4,916m for the six months ended 30 September 2001 to £8,574mand now represents 58% of turnover, compared with 55% for the six months ended 30 September 2001. TheGroup’s equipment costs and cost of providing financial incentives to service providers and dealers foracquiring and retaining customers reduced to 12.4% compared with 14.6% of turnover for the comparative sixmonthperiod. This excludes the effects of the first time inclusion of J-Phone Vodafone where costs to connectand retain customers, although reducing, are significantly higher than in the Group’s other markets. Thisdecrease reflects the continued focus on gaining and retaining high-value customers in the most cost-efficientmanner. Inclusive of J-Phone Vodafone, equipment costs and financial incentives amounted to 19.0% ofturnover.Sales and administration costs, excluding goodwill amortisation and exceptional items, increased from£1,744m to £2,720m, the increase being attributable almost entirely to the first time inclusion of J-PhoneVodafone and Japan Telecom. These costs represented 18.3% of turnover for the six months ended 30September 2002 compared with 19.6% for the comparable six months, demonstrating the Group’s ongoingfocus on cost control and the realisation of synergies.Depreciation increased by £839m to £1,892m, primarily as a result of the consolidation of the results of JPhoneVodafone and Japan Telecom. Excluding the effects of J-Phone Vodafone and Japan Telecom, theGroup’s depreciation charge increased 12% over the comparable period.Operating results
    The total Group operating profit for the period, before exceptional items and goodwill amortisation, increasedby 37% from £3,392m to £4,640m, including an increase of £620m in respect of J-Phone Vodafone and JapanTelecom, which both became subsidiaries of the Group in October 2001.After goodwill amortisation and exceptional items, the total Group operating loss improved from a loss of£7,820m in the six months ended 30 September 2001 to a loss of £2,197m for the six months ended 30September 2002 as the increased goodwill amortisation charge of £140m was more than offset by a £4,515mreduction in exceptional operating items and the £1,248m improvement in operating profit.Proportionate results
    Proportionate turnover increased 15% to £16,517m as a result of strong organic growth together with the effectof increased stakes in certain of the Group’s existing businesses, principally Japan Telecom and J-PhoneVodafone. In the mobile businesses, proportionate turnover also grew by 15% to £15,459m, including 10%organic growth in service revenues.The Group’s proportionate EBITDA margin in the mobile businesses increased from 35.4% in the comparableperiod to 39.0% in the six months ended 30 September 2002, with all the Group’s main markets reportingincreased EBITDA margins. Greater control over customer acquisition and retention costs accounted for 1.5 ofthe 3.6 percentage point increase in the Group’s mobile EBITDA margin during the period, with the remainderof the margin improvement arising from ongoing cost control and the realisation of synergies. In Japan,proportionate mobile EBITDA margins have been improved from 20.5% to 32.0%, as a result of lower customeracquisition and retention costs and the continuing benefits generated through the merger of regional operatingcompanies into a single structure. This increase was also achieved against a backdrop of continued strongdemand for camera-enabled handsets and increased competition.A regional review of the Group's principal business, the supply of mobile telecommunications services andproducts, is presented below. A review of the Group's other operations, which primarily comprise fixed linetelecommunications businesses, can be found on pages 14 and 15. Pages 15 and 16 also contain an updateon progress made with the Group's data products and services initiatives, including Vodafone live! andVodafone Mobile Office. Further information on the Group’s financial performance can be found on pages 17to 19. A summary of the outlook for the financial years ended 31 March 2003 and 2004 can be found on pages19 and 20. The appendices to these results also contain information on certain key performance indicators forthe quarter and six months ended 30 September 2002, including details of the registered customer base,ARPU and non-voice service revenue data.Mobile Telecommunications
    The Group's mobile businesses were the principal drivers of growth in the period and continue to demonstratethe Group's operational strength, with turnover and operating profit, before goodwill amortisation andexceptional items, increasing by 59% and 30% to £13,440m and £4,675m, respectively. The Group continuedto expand its customer base in the period, adding a further 6.4 million customers to its proportionate registeredcustomer base. At 30 September 2002 the Group had 107.5 million proportionate registered customers and atotal venture base of 273.2 million, compared with 101.1 million and 229.2 million, respectively, at 31 March2002.United Kingdom
    Vodafone UK reported strong profit growth as it continued to realise benefits from the acquisition and retentionof high value customers and the continuing focus on cost efficiencies. This is reflected in a 37% increase intotal Group operating profit, before goodwill and exceptional items, achieved on an 11% increase in statutoryturnover. Operating efficiency initiatives, including the benefits of last year’s restructuring, have contributedstrongly to a 5.7 percentage point increase in EBITDA margin.The trend of declining ARPU in the market place was reversed with blended ARPU for the twelve months to 30September 2002 increasing to £282 compared to £276 for the twelve months ended 31 March 2002. Improvedcustomer activity levels contributed to this increase with active customers increasing from 89% of the base at31 March 2002 to 93% at 30 September 2002. In addition, Vodafone UK’s share of outgoing mobile servicerevenue in Oftel’s quarterly review stands at 33.9%, representing a lead of 6.7% over the second placed UKnetwork.In the twelve months ended 30 September 2002, data revenue as a percentage of service revenue hasincreased to 13.2% compared to 11.8% for the year ended 31 March 2002 and 8.9% for the twelve monthsended 30 September 2001. This is primarily due to continued increases in SMS penetration and usage in boththe contract and prepaid base, as customers take advantage of the full range of products and servicesavailable.Contract ARPU has fallen from £555 to £536 due to the continued migration of higher value prepaid customersonto contract tariffs. Notwithstanding this migration, Vodafone UK has seen an increase in prepaid ARPU to£121 as opposed to £118 for the twelve months to 31 March 2002 as inactive customers were disconnected.As at 30 September 2002, Vodafone UK had 12,957,000 registered customers, of whom 5,264,000 werecontract customers. The contract base now makes up 41% of the total base, which represents an improvementof three percentage points since 31 March 2002. Vodafone UK’s contract base now exceeds that of its nearestcompetitor by 26%. The period saw the proportion of active prepaid customers increase from 84% of theprepaid base at 31 March 2002 to 90% at 30 September 2002.Blended churn for the twelve months to 30 September 2002 increased when compared to the twelve months to31 March 2002 as a result of increased disconnections of the inactive prepaid base. Contract churn has fallenfrom 26.1% to 23.5% for the twelve months to 30 September 2002, whilst prepaid churn has risen to 33.5%.Whilst continuing to invest in the connection of higher value customers, the UK business maintained a stablecontract cost to connect of £121, compared with £119 for the six months ended 30 September 2001. Theaverage cost to connect for prepaid customers fell from £32 to £10, improving the profitability of this marketsegment further.Other Northern Europe
    The Group successfully completed the rollout of its rebranding programme across its other interests withinNorthern Europe as Europolitan Vodafone migrated to the single Vodafone brand in April 2002. Vodafonebrand awareness was further strengthened across the region with the launch of the ‘How are you?’ campaignsin The Netherlands, Sweden and Ireland.The Group’s other interests within Northern Europe reported strong financial performance. Statutory turnoverincreased by 26% over the period partly as a result of the enlarged customer base and increased voice anddata revenues. Voice revenues increased in all Other Northern Europe markets, with a particularly strongincrease reported in Vodafone Netherlands, where blended ARPU increased by 7%. Data revenues also grewacross the region including Vodafone Ireland where data and SMS revenues for the twelve months ended 30September 2002 represented 17% of total service revenues.The proportionate registered customer base increased by 264,000 to 10,084,000 and was driven by continuedgrowth by SFR in the relatively under-penetrated French market and increased consumer sales in Sweden,including the successful launch of its new Vodafone-branded prepaid product. Vodafone Ireland alsoconsolidated its position as the largest mobile operator in Ireland with a 57% market share.In July 2002, Vodafone Ireland was awarded one of four twenty-year UMTS licences for a total cost of €114m.Germany
    The robust operating results for Vodafone Germany, which were achieved against a backdrop of difficulteconomic conditions, reflect the benefits arising from its customer base management programme, which hasseen the continued removal, during the first quarter, of inactive prepaid customers from the customer base, anincrease in the contract base and the launch of further innovative products and services.Statutory turnover increased as a result of higher levels of voice usage and improved data and messagingrevenues, which now represent 15.4% of service revenues, with data revenues benefiting from continuedstrong SMS usage and increased mobile internet activity. The launch of Multimedia Messaging Services,“MMS”, in April 2002, the first such launch in Germany, and other services such as premium SMS and GPRSroaming also contributed to the improved data revenue performance. Equipment revenues were lower as aresult of increased levels of SIM-only connections.The downward trend in customer numbers was reversed in the period, despite the continued removal ofinactive prepaid customers from the customer base, as Vodafone Germany was able to increase the number ofcontract customers in the twelve month period to 30 September 2002, increasing the share of contractcustomers in its base from 40% at 30 September 2001 to 45%. Vodafone Germany introduced furtherinitiatives aimed at improving the customer mix including the launch of a customer loyalty programme,“Vodafone Stars”, and the signing of a co-operation agreement with Lufthansa, to strengthen customer loyaltywithin the business segment and to better address the requirements of high value roaming customers. As aresult, Germany increased the proportion of its customer base that is active to 92% at 30 September 2002,compared with 91% at 31 March 2002.The improved mix in the customer base has contributed to the improved blended ARPU performance, withprepaid ARPU for the twelve months to 30 September 2002 increasing to €121 from €110 for the twelvemonths to 31 March 2002. Contract ARPU reduced to €542, compared with €559 for the twelve months to 31March 2002. The increase in the blended churn rate can be attributed to a slightly reduced contract churnrate, which decreased from 18.3% to 16.3%, offset by the prepaid churn rate which increased from 27.1% to32.5% as a result of the removal of inactive customers from the prepaid customer base.Operating profit benefited from improved equipment margins as a result of lower handset subsidies, withprepaid cost to connect reducing to €19 and contract cost to connect reducing to €129, benefiting from anincreased share of SIM-only connections. Further increases in the EBITDA margin were also made as a resultof improved operational efficiency.Other Central Europe
    The Group’s other interests within Central Europe reported improved financial performance, reflecting bothcontinued growth in the mobile markets represented and improved operational efficiency.In the six month period from 31 March 2002, the proportionate registered customer base increased by 14%,with Vodafone Hungary increasing its customer base by 27%. In Poland, penetration levels improved from28% to over 32% in the period, with Polkomtel increasing its customer base by 13%. The Polish market wasparticularly competitive during the period as the third largest operator chased market share ahead of customerprofitability. However, Polkomtel’s ARPU remains the highest in Poland.Voice and data revenues in Hungary grew significantly over the comparable period as a result of a 27%increase in its customer base and were also boosted by improved roaming revenues and the launch of prepaidroaming top-ups.The increase in proportionate turnover includes the effect of an 18.2% stake increase in Vodafone Hungaryand a 7% increase in turnover in Polkomtel. Voice and data revenues increased in Swisscom Mobile althoughthe increase was partly offset by a decline in national roaming turnover and reduced revenue from handsetsales.EBITDA margins improved in all of the businesses within Other Central Europe.Italy
    The results for Vodafone Omnitel demonstrate continuing strong operational performance, with VodafoneOmnitel consolidating its position as the second largest operator in the 90% penetrated Italian mobile market.Statutory turnover increased by 20% which was mainly attributable to an 18% increase in service revenuesdriven by higher usage levels, increased average customer base and improved margins on prepaid top-ups,which more than offset Vodafone Omnitel’s decision to reduce termination rates during the period and lowerrevenues from national roaming. After adjusting 2001 results onto a comparable basis for distributor discountson prepaid top-up cards, statutory turnover and service revenues increased by 15% and 14%, respectively.Service revenue growth was also boosted by data revenues, which increased by 50% compared with the sixmonth period ended 30 September 2001 and for the month of September 2002 represented 10.4% of servicerevenues, with almost 53% of customers using data products. This increase was primarily due to higher SMSrevenues reflecting successful promotional activities. Proportionate EBITDA, before goodwill amortisation andexceptional items, increased by 20%. The proportionate EBITDA margin, after adjusting 2001 results onto acomparable basis for distributor discounts on prepaid top-up cards, increased from 47.3% to 49.4%.Prepaid ARPU remained stable at €296 for the twelve months to 30 September 2002 compared to €297 for the12 months to 31 March 2002. Contract ARPU benefited from Vodafone Omnitel’s targeted acquisition andretention policy and increased from €769 in the year ended 31 March 2002 to €794 for the twelve monthsended 30 September 2002. Total average cost to connect reduced to €26 as a result of Vodafone Omnitel’scommercial policies.Since 31 March 2002, Vodafone Omnitel’s registered customer base increased over 3% and, at 30 September2002, stood at 18,316,000, 91% of whom were connected to prepaid tariffs and only 6% of whom wereconsidered inactive. On 7 October 2002, the number of competitors in the Italian market reduced to threefollowing the split-up and sale of Blu’s assets, part of which have been acquired by Vodafone Omnitel.Competition was further intensified following the introduction of mobile number portability and as otheroperators sought to emulate the success of Vodafone Omnitel’s Omnione loyalty programme by developingtheir own commercial offers and incentives aimed at sustaining customer loyalty. In this environment,Vodafone Omnitel was able to slightly reduce its churn rate and make net customer gains. Furthermore, in themost recent customer satisfaction survey carried out in the period, Vodafone Omnitel confirmed its leadershipover competitors.During the period, Vodafone Omnitel increased its focus on providing innovative value added services to itscustomer base, introducing MMS services, which were successfully launched in June 2002 making VodafoneOmnitel the first to do so commercially in Italy, GPRS roaming and international prepaid top-up facilities.In other developments, the Italian Government agreed to extend the duration of 2G and 3G licences fromfifteen to twenty years.Other Southern Europe
    The Group’s other interests within Southern Europe continued to achieve strong results.The increase in statutory turnover over the period was principally driven by a combination of an increasedcustomer base and higher usage levels. Turnover was adversely affected by outgoing and incoming tariffreductions in Spain from March 2002 and incoming tariff reductions in Greece in August. The period also sawthe introduction of a fourth mobile operator into the Greek market.Data revenues grew particularly strongly, largely as a result of higher SMS revenues and in response tosuccessful launches of premium SMS products and services within Spain. The launch of MMS in Greece andPortugal, where Vodafone companies were the first operators to offer such services, is expected to contributeto future increases in data revenues. Proportionate registered customers increased 10% to 11,983,000,including the effect of an additional 2.2% stake increase in Vodafone Spain.Vodafone Portugal maintained its overall market position as the second largest operator in Portugal whilststrengthening its leadership in the contract segment.The Group’s operations in Albania, Malta and Romania all continue to perform satisfactorily in terms ofcustomer growth and profitability. In particular, Albania, which has only been operating for fourteen months,now has a market share of over 40%. In Romania, the Government is shortly to award four UMTS licences.Verizon Wireless
    Verizon Wireless operates in a highly competitive market place, which currently consists of six nationwidecompetitors and several regional and smaller rural carriers, and has retained its position as the leading mobiletelecommunications provider in the United States in terms of number of customers, network coverage andrevenues. Difficult economic conditions in the US have resulted in net customer growth slowing considerablyfrom prior years. Nevertheless, Verizon Wireless has continued its strong growth in customer net additions forthe last two quarters due to successful marketing campaigns.The increase in proportionate turnover for the period is primarily due to increased service revenue from thelarger customer base, as well as additional handset sales for both upgrades and gross additions. Theproportionate EBITDA margin decreased slightly as a result of higher retention costs and higher acquisitioncosts. Statutory total Group operating profit, before goodwill and exceptional items, decreased primarily due toa 43% higher depreciation charge resulting from increased capital expenditure to handle increased usageresulting from bundled tariffs and to improve network capacity in spectrum-constrained areas. The results forthe period were also impacted by the relative strength of sterling against the US Dollar. Proportionate turnoverand proportionate EBITDA in local currency grew by 9% and 6%, respectively.At 30 September 2002 Verizon Wireless’ total customer base stood at 31,521,000. Approximately 94% ofcustomers were on contract plans and there were approximately 1.5 million data users, the majority of whomwere Mobile Web customers. SMS usage has grown significantly in the last six months due to the launch ofinter-carrier interoperability earlier this year. However, competitive pressures have had an unfavourable impacton ARPU with competitors’ tariffs now incorporating large numbers of bundled minutes and have resulted inincreased cost to connect through higher handset subsidies and higher trade commissions. The period hasalso seen Verizon Wireless continue to roll out its CDMA 1XRTT network and extend total coverage to 172million people, representing 75% of the Verizon Wireless national footprint.Verizon Wireless has $261 million on deposit with the Federal Communications Commission (“FCC”)representing 15% of the payment made in relation to the re-auction of licences for 1.9GHz spectrum (“Auction35”). On 12 September, the FCC issued a public notice seeking comment on either dismissing pendingapplications or allowing bidders to opt-out of Auction 35. Verizon Wireless and most of the other high biddersare urging the FCC to make a timely decision on this matter. Verizon Wireless believe that to meet expectedusage demands in its most densely populated areas, they will require extra spectrum in the next eighteen tothirty months.Other Americas
    Grupo Iusacell increased its customer base from 1,995,000 at the beginning of the period to 2,176,000 at 30September 2002. This 9% increase is primarily due to growth in prepaid customer numbers within aconsolidating and increasingly competitive market. However, Grupo Iusacell experienced erosion of highervalue contract customers and an increase in the number of inactive prepaid customers, resulting in declines inboth ARPU and EBITDA. Strategic initiatives are being implemented to improve performance including theappointment of a new chief executive officer, headcount reductions and an internal reorganisation.In August 2002, the sale of two Globalstar service provider companies, Globalstar USA and GlobalstarCaribbean, was finalised. Efforts to sell the last remaining Globalstar service provider, Globalstar de Mexico,are continuing.Japan
    Proportionate turnover for J-Phone Vodafone increased significantly from the comparative period, and includesa full period effect of the stake increases that took place during the last financial year. The increase alsoreflects strong customer growth, together with the success of J-Phone Vodafone’s data and content productofferings. The results of J-Phone Vodafone were not fully consolidated until 12 October 2001.Penetration in the Japanese cellular market reached 57% by the end of September 2002, representing growthof 2% over the period. Notwithstanding the slowdown in market growth, J-Phone Vodafone consistentlycaptured a higher percentage of net customer additions in each month in the period compared to its cumulativemarket share. This can largely be attributed to the strength of the brand and the popularity of camera andinternet enabled handsets. Furthermore, J-Phone Vodafone is using an attractive mix of handsets combinedwith innovative services to attract and retain customers, which has contributed to the reduction in customerchurn.J-Phone Vodafone enjoys the highest ARPU of any company within the Vodafone Group and the success ofdata and content products resulted in further increases in data and SMS revenues, which exceeded 20% ofservice revenues in August and September 2002. However, the positive effect this had on ARPU was morethan offset by the expected decline in voice ARPU.Total average cost to connect decreased following a reduction in acquisition incentives and more cost efficientand effective purchasing of handsets. Additionally, J-Phone Vodafone made savings on operating costs whichcontributed to significant growth in EBITDA. As a result, the mobile EBITDA margin increased from 20.5% to32.0%.J-Phone Vodafone realised substantial capital expenditure efficiencies during the period as a result of themerger of J-Phone Vodafone’s operating companies and from the improved purchasing position it enjoys as amember of the Vodafone Group. These efficiency gains have enabled J-Phone Vodafone to concentrate itscapital expenditure on 3G infrastructure and pursue a faster and more efficient rollout of its 3G network as itprepares for commercial launch in December 2002.Other Asia Pacific
    In Australia, an extremely competitive and maturing market, EBITDA increased by 14% due to a continuedfocus on improving operational efficiency and a change in product marketing and distribution strategy. Costbase rationalisation has continued over the last six months with restructuring activities reducing the workforceby 12%. Handset subsidies have also been phased out on plans targeted at retail customers.Over the last six months, Australia experienced an initial decline in blended ARPU due to the increase in theproportion of lower spending prepaid customers. However, contract ARPU is now stabilising with anincreasing trend in SMS and data revenue.In the six months to 30 September 2002 Vodafone New Zealand increased its EBITDA by 34%, revenues by18% and blended ARPU by over 2%.China Mobile (Hong Kong) Limited (“China Mobile”) saw monthly customer growth slow between June 2002and September 2002 due to seasonal effects and aggressive marketing by a competitor that included bundledhandset and tariff plans on its newly launched CDMA network. However, excluding the effect of theacquisition referred to below, the customer base still grew by over ten million in the period. Monthly ARPUcontinued to fall after showing signs of stabilising earlier in the year as a result of lower tariffs aimed atretaining customers as competition increased. SMS volumes continued to grow substantially with 7.8 billionmessages sent in the first quarter of the current financial year, up from 4.8 billion in the prior quarter.On 18 June 2002 Vodafone invested a further US$750m in China Mobile and obtained the right to appoint anon-executive director to the China Mobile board. Subsequently on 1 July 2002 China Mobile acquired from itsparent eight provincial cellular operations with a total of 25,143,000 customers. Vodafone’s stake in ChinaMobile increased to approximately 3.27% as a result of these two transactions. The two companies’ strategicalliance has been further strengthened in areas such as roaming, standards and best practice.Middle East and Africa
    Vodafone Egypt reported significant customer growth during the period of 261,000 to 1,979,000 at 30September 2002.In South Africa, Vodacom continued to grow strongly with a 23% proportionate EBITDA improvement andcustomer growth of 9% to 7,130,000. Additionally, Vodacom’s operation in Tanzania is now contributing apositive operating profit in its second year of operation.In Kenya, Safaricom consolidated its position as the largest mobile operator with 55% of the market ascustomer numbers increased by 32% to 581,000 during the period.STRATEGIC DEVELOPMENTS
    Products and Services
    The Group’s vision is to be the world’s mobile communications leader. A major focus of the Group’s strategy isto offer innovative products and services within Vodafone-branded, end-to-end customer propositions whichutilise the Group’s global footprint and global brand to offer customers a unique mobile experience andseamless international services.Brand
    Since April 2002, a number of significant achievements have been made to progress this strategy. Thecompany implemented its strategy to introduce the Vodafone brand into all its controlled mobile businessesand, at 30 September 2002, all mobile subsidiaries other than Italy and Japan had migrated to the singleVodafone brand. Omnitel Vodafone in Italy rebranded as Vodafone Omnitel during June 2002. In Japan, JPhoneVodafone is to migrate to the single brand by December 2003. As a result of the brand rollout and thecontinuing “How are you?” advertising campaign, the Group has improved considerably its brand awareness.Vodafone branding is now focused on building upon its brand awareness and turning this into brandpreference.This year, the Group became a principal sponsor of Ferrari, further promoting the awareness of the brandglobally and creating joint product development and merchandising opportunities. Vodafone also continues tobenefit from its sponsorship of Manchester United.The strength of Vodafone’s brand and its portfolio of international services led to the signing of a further partneragreement with MTC of Kuwait. Under this agreement, both Vodafone and MTC customers will now be able tobenefit from easy access to Vodafone’s international services. The Group’s two existing partner agreements,with Radiolinja of Finland and TDC of Denmark, are now fully operational. These agreements allow the Groupto secure a return on its investment in a global brand and have the added benefit of extending the Group’sglobal footprint without the need for equity investment.New service offerings
    The Vodafone brand is also of fundamental importance to the Group’s latest, and most significant serviceoffering, Vodafone live!. Launched in seven countries during October and early November, Vodafone live! is amajor Group-wide programme, designed to offer the customer an integrated experience of handset andservices. Vodafone live! is built around easy to use mobile services such as picture messaging, games, ringtones and mobile content. Vodafone live! and Vodafone Mobile Office, the business proposition, are bothexpected to build brand preference amongst customers.Vodafone live! represents a significant step forward for the Group, involving development of an integratedcustomer proposition and service offering together with the customisation of handsets with the Vodafonebrand, Vodafone-specific menus with embedded links and Vodafone-specific games and content all launchedon a co-ordinated pan-European basis. It represents a significant building block in the attainment of theGroup’s data strategy.Part of the Vodafone live! customer offering is a wide range of high quality, multi-media entertainment-ledcontent containing both international and local information. This is provided by Vodafone Global ContentServices, formerly Vizzavi, which became a wholly-owned subsidiary of the Group in August 2002.Vodafone further extended its range of compelling product and service offerings for customers with the launch,in July, of a prepaid top-up service for international travellers, enabling prepaid customers to use their mobileswhen abroad as if they are using them at home. This service is now available in eleven countries. This wasfollowed, in September, by the launch of Eurocall Platinum, a service aimed at reducing the cost of calls forhigh value roaming customers, building on the success of Eurocall, Vodafone’s single rate European priceplan, launched in January 2001.Another major part of the Group’s growth strategy is Vodafone Mobile Office. The Group already offersservices that provide mobile access to corporate intranets and office-based applications at speeds comparableto those available through standard fixed telephone lines. With Vodafone Mobile Office, the Group’s offeringsfor business and corporate customers will be brought together to deliver easy and seamless access tocorporate information systems and business applications over the Vodafone network. The first part of theGroup-wide Vodafone Mobile Office programme will be launched shortly and is called “Vodafone RemoteAccess”, a pan-European Vodafone-branded solution for secure, remote connection of laptops to the corporatenetwork using a Vodafone-enabled GPRS data card and customised software. With over eight million laptopsin Western Europe alone being accessed away from the desk, this represents a significant opportunity for theGroup.3G
    The development and rollout of the Group’s 3G networks remains an important element of its data strategy,with 3G networks offering both increased spectrum capacity and quality of service. A Group-wide 3Gprogramme management team has been put in place to oversee the project. To date, the Group has achievedits initial operating target of having commenced internal user field trials in five European networks as well as inJapan. Over the next 12 months the Group intends to have its 3G infrastructure technically ready andoperational in major markets, with Japan being the first of the Group’s networks to launch in December 2002.SynergiesThe globalisation of the Group’s supply chain relationships is advancing. The Group is now either managing orco-ordinating centrally the purchase of network infrastructure (including that related to 3G) and IT platformsused for building services, as well as handsets and other items such as consultancy services. Global supplychain management is generating significant synergy savings for the Group and is playing a key role in theVodafone live! programme, ensuring availability of Vodafone-configured handsets through intensive liaison withhandset suppliers.Good progress has been made on the synergies arising from the Mannesmann transaction. It is expected thatthe £500m of forecast post tax cash flow synergies for the year ending March 2003 will be exceeded.FINANCIAL UPDATE
    Profit and loss account
    Total Group operating profit/loss
    Before goodwill amortisation and exceptional items, total Group operating profit increased 37% to £4,640m inthe six months ended 30 September 2002 from £3,392m in the six months ended 30 September 2001,comprising £4,650m profit from continuing operations and £10m loss from the acquisition of Vizzavi.After goodwill amortisation and exceptional items the Group reported a total operating loss of £2,197m,compared with a loss of £7,820m for the comparable period. This net change of £5,623m arose as a result ofa £4,515m reduction in respect of exceptional items, and a £1,248m increase in operating profit partly offsetby a £140m increase in the goodwill amortisation charge, which increased primarily as a result of theacquisition of J-Phone Vodafone and Japan Telecom in the second half of the 2002 financial year. Thesecharges for goodwill amortisation do not affect the cash flows of the Group or the ability of the Group to paydividends.Exceptional items
    There were no exceptional operating items charged in the six months to 30 September 2002. During thecomparable period to September 2001, exceptional operating items of £4,515m consisted primarily ofimpairment charges in relation to the carrying value of goodwill for Arcor and Grupo lusacell.Exceptional non-operating income of £267m (30 September 2001: charge of £248m) mainly represents a profiton disposal of fixed asset investments of £268m, principally relating to the disposal of the Group’s interest inBergemann GmbH, through which the Group’s 8.2% stake in Ruhrgas AG was held.In accordance with UK accounting standards the Group regularly monitors the carrying value of its fixedassets. At 31 March 2002, a review was undertaken which assessed whether the carrying value of its assetscould be supported by the net present value of future cash flows derived from assets using cash flowprojections for each asset in respect of the period to 31 March 2011. This review resulted in the impairment ofcertain of the Group’s assets. A further review was undertaken at 30 September 2002 which includedmonitoring actual cash flows to date against those previously forecast. The results of the review indicated thatno further impairment charges were necessary.Earnings per share
    Basic earnings per share, before goodwill amortisation and exceptional items, increased 31% from 2.51p to3.28p for the period to 30 September 2002.Basic loss per share, after goodwill amortisation and exceptional items, decreased from a loss per share of14.36p to a loss per share of 6.36p for the period to 30 September 2002. The loss per share of 6.36p includesa charge of 10.03p per share (30 September 2001: 9.88p per share) in relation to the amortisation of goodwilland a credit of 0.39p per share (30 September 2001: charge of 6.99p per share) in relation to exceptionalitems.Cash flows and funding
    The increase in operating profit, before goodwill amortisation and exceptional items, in the six month periodended 30 September 2002 translated into strong operating cash flows, which increased 56% over thecomparable period to £5,676m, including over £1.4 billion of operating cash flows from the Group's formerassociated undertakings Japan Telecom and J-Phone Vodafone.During the six months ended 30 September 2002, the Group increased its operating free cash flow by 80% to£2,947m and generated £2,878m of free cash flow, exceeding the levels generated for the whole of theprevious financial year.The Group also invested a net £0.9 billion in merger and acquisition activities, and an analysis of the significanttransactions is shown below:Table 1: Aquisition/Disposal Impact on Net Debt, H1

    Impact on net debt� billion

    Stake increase in China Mobile

    0.5

    Stake increase in Vodafone Spain

    0.4

    Purchase of minorities in Vodafone AG

    0.3

    Increase minority stakes in other subsidiaries

    0.2

    Purchase of remaining 50% interest in Vizzavi

    0.1

    Disposal of Ruhrgas and Arcor�s Telematik business

    -0.7



    As a result of the significant levels of free cash flow generated and after merger and acquisition activity, Groupdividend payments of £511m and £155m of foreign exchange movements, the Group’s consolidated net debtposition at 30 September 2002 decreased to £10,697m, from £12,034m at 31 March 2002. This representedapproximately 19% of the Group’s market capitalisation at 30 September 2002 compared with 14% at 31March 2002.The Group remains committed to maintaining a solid credit profile. Following the proposed acquisitions ofinterests in Cegetel Groupe S.A., Fitch affirmed Vodafone’s stable outlook and long term credit ratings at A andshort term credit ratings at F1 on 16 October 2002. On 17 October 2002, Standard & Poor’s affirmedVodafone’s stable outlook and long term credit ratings at A and short term credit ratings at A1 and Moody’s,although changing Vodafone’s outlook to negative, affirmed the Group’s long term credit ratings at A2 and shortterm credit ratings at P1.The Group’s credit ratings enable it to have access to a wide range of debt finance including commercial paper,bonds and committed bank facilities. The Group currently has US and euro commercial paper programmes ofUS$15 billion and £5 billion, respectively, which are used to meet short-term liquidity requirements. Thecommercial paper facilities are supported by a US$11.025 billion committed bank facility, which may beextended for one year from June 2003. This facility replaced the Group’s previous US$13.7 billion committedbank facility and as at 30 September 2002 no amounts had been drawn under it. The Group also has a JPY225billion committed bank facility which was fully drawn down on 15 October 2002 and a new fully underwritten€3.5 billion bank term loan, maturing in January 2006. This term loan is available should the total considerationin respect of the acquisition of interests in Cegetel Groupe S.A. exceed €5 billion and existing pre-emptionperiods have either been waived or have expired. At 31 October 2002, the Group had approximately £10.5billion (pounds sterling equivalent) of capital market debt in issue, with maturities from April 2003 to February2030 and £3.0 billion (pounds sterling equivalent) of term funding.OUTLOOK
    For the year ending 31 March 2003
    The strategic focus on acquiring and retaining high value customers is expected to continue to benefit theGroup in the second half of the financial year, with organic proportionate customer growth sustaining themomentum of the first half into the second.The achievement of the expected organic customer growth rate and the increase in proportionate customersthat would result from the exercise of the put option held by the minority shareholders owning 6.2% ofVodafone Spain, should generate annual growth in total proportionate customers of over 10%.In addition, the trend seen in the six months to 30 September 2002 of either stabilisation or modestimprovements in seasonally adjusted ARPU in some key markets against that achieved in the same period lastyear is anticipated to continue in the second half, driven by further improvements in customer activity levels, ahigher proportion of contract customers in the total base and increased voice and data usage. The double-digitproportionate revenue growth achieved in the first half is expected to continue.The proportionate mobile EBITDA margin increased in the current period to 39.0%, an increase of 3.6percentage points over that achieved in the comparable period last year. For the full year it is expected that theproportionate mobile EBITDA margin will exceed that achieved in the last financial year and the proportionate mobile EBITDA margin for the second half will be better than last year’s second half. However, theproportionate mobile EBITDA margin for the full year is expected to reduce from the level achieved in the firsthalf of this financial year, primarily as a result of the cost of advertising campaigns promoting our new serviceofferings and the impact of expected incoming call termination rate reductions in a number of the Group’s keymarkets in the second half of the year.Total Group operating profit, before goodwill and exceptional items, for the year is also expected to besignificantly better than that achieved in the previous financial year as a result of the consolidation of JapanTelecom and J-Phone Vodafone for a full year and an increased contribution from existing businesses.However, the expected reduction in mobile EBITDA margin in the second half of the year together with higherdepreciation, particularly in Japan as the 3G network opens for service, is expected to lead to the second halfyear operating profit, before goodwill amortisation and exceptional items, being lower than that achieved in thefirst.Strong free cash flow generation is expected to continue in the second half of the year with total free cash flowfor the year expected to exceed that achieved in the previous year by a substantial margin. However, free cashflow for the second half year is expected to be less than that achieved in the first half, both as a result of thelower operating result outlined above and higher tax payments, which are expected to approach £1 billion forthe full year compared with £154 million for the first half. Capital expenditure of over £5.5 billion is nowexpected for the year.In the second half of the year, in addition to acquiring an increased interest in Vodafone Spain, the Group mayacquire further interests in Cegetel and in its controlled publicly listed companies. These stake increases wouldimpact the expectations for the second half of the financial year outlined above.For the year ending 31 March 2004
    In respect of customer growth, the combination of high single-digit organic growth and stake increases isexpected to lead to average customer numbers increasing over 10% compared with this financial year. Theexpected trend in ARPUs, combined with this customer growth, should lead to double-digit revenue growth.The expected revenue growth combined with modest margin improvements is expected to generate growth inGroup proportionate EBITDA for the year ending 31 March 2004 of above 15%. Tangible capital expenditureis expected to be a similar level to the 2003 financial year although capital efficiency, measured as the ratio ofcapital expenditure to statutory turnover, is expected to improve.Any significant acquisitions or disposals of businesses would impact the expectations for the financial yearending 31 March 2004 set out above.TRANSACTIONS
    The Group undertook the following significant transactions in the six months to 30 September 2002:Acquisitions
    a) Acquisitions of minority stakes in subsidiary undertakings
    On 2 April 2002, the Company acquired a further 2.2% stake in Airtel Móvil, S.A. (“Vodafone Spain”), for theEuro equivalent of £0.4 billion, following the exercise of a put option held by Torreal, S.A. This increased theGroup’s interest in Vodafone Spain from 91.6% to 93.8%.On 3 May 2002, the Group completed the purchase of the 4.5% minority interest in Vodafone Pacific, as aresult of which Vodafone Pacific became a wholly owned subsidiary undertaking.The Group increased its interest in its listed subsidiary companies, Vodafone Telecel-Comunicacoes PessoaisSA (“Vodafone Portugal”) and Europolitan Vodafone AB (“Vodafone Sweden”), through a series of marketpurchases at a total cost of £151.4m. As at 30 September 2002, the Group’s interests in Vodafone Portugaland Vodafone Sweden had increased by 10.5% and 3.6% to 61.4% and 74.7%, respectively.On 21 August 2002, the Group bought out the outstanding minority shareholders in Vodafone AG, formerlyMannesmann AG, for the Euro equivalent of £281m.b) Other acquisitions
    On 18 June 2002, the Group purchased a further stake of approximately 1.1% in China Mobile for US$750m,increasing the Group’s interest in China Mobile to approximately 3.27%.On 29 August 2002, the Group acquired Vivendi Universal S.A.’s 50% stake in the Vizzavi joint venture, whichoperates the mobile content business, for €143m. As a result of this transaction, the Group owns 100% ofVizzavi, with the exception of Vizzavi France which is now wholly owned by Vivendi Universal S.A.Disposals
    On 8 July 2002, the Group completed the sale to E.ON AG of its 23.6% stake in Bergemann GmbH throughwhich it held an effective 8.2% stake in Ruhrgas AG. The total cash received amounted to €0.9 billion.Subsequent events
    Cegetel Groupe S.A. (“Cegetel”)
    On 16 October 2002, the Group announced that it had agreed to acquire BT Group plc’s (“BT’s”) 26% interestin Cegetel, the controlling shareholder of the French mobile operator SFR, and SBC Communication Inc.’s(“SBC’s”) 15% interest in Cegetel for €4.0 billion cash and €2.3 billion cash, respectively. At the same time,the Group also announced that it had made a non-binding cash offer of €6.8 billion to Vivendi Universal, S.A.,(“Vivendi”) for its 44% interest in Cegetel. Vivendi has pre-emption rights over BT and SBC’s interests inCegetel.On 21 October 2002, the Group announced plans for financing these transactions, including details of a new€3.5 billion bank term loan which matures in January 2006 and which is available upon completion of theacquisition. Further funding would be met from a combination of available cash resources, commercial paperprogrammes and existing undrawn bank facilities. The Group would not need to raise funds in the bondmarkets to finance these acquisitions. On 18 October 2002, the Group cancelled US$174m of its US$1,750mFebruary 2005 dollar bond that had previously been repurchased.On 29 October 2002, the Board of Vivendi announced it had decided not to accept the Group’s offer topurchase its 44% interest in Cegetel and, accordingly, the offer lapsed.On 6 November 2002, the Group announced that Vivendi will be entitled to exercise its pre-emption rights from21 November 2002 until 10 December 2002. The Group also announced that it has renewed its initial offer atthe same price to Vivendi to last for the duration of the pre-emption period. Until such time as the offer isformally accepted by Vivendi, the Group reserves the right to withdraw its offer at any time.Vodafone Group plc

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