Vodafone Group Plc (VOD)
Year Ended 31 March 2006, Earnings Results and Strategy Update
May 30th, 2006 4.30 am EST
Arun Sarin, Chief Executive Officer
Andy Halford, Chief Financial Officer
Bill Morrow, Chief Executive Officer, Europe
Paul Donovan, Chief Executive Officer, Central Europe, Middle East, Asia Pacific and Affiliates
Thomas Geitner, Chief Executive Officer, New Businesses and Innovation
Fritz Joussen, Chief Executive Officer, Germany
Simon Weedon, Goldman Sachs
Gareth Jenkins, Deutsche Bank
Paul Howard, Cazenove
Christian Maher, Investec Securities
Nick Delfas, Morgan Stanley(?)
Kristian Kohn, Lehman Brothers(?)
Robert Grindle, Dresdner Kleinwort Wasserstein
Terry Sinclair, Citigroup
Justin Funnel, Credit Suisse
Laura Conigliaro, Goldman Sachs(?)
Andrew O'Neill, Sanford Bernstein
Earnings Results Presentation
Arun Sarin, Chief Executive Officer
Good morning ladies and gentlemen. Thank you very much for coming to Vodafone's results and strategy update day. Our agenda today is a bit longer than usual. Andy and I will be covering the results presentation, which is the first part, which will be about 30 minutes or so. We'll then get into the strategy update, and my colleagues and I - who'll I introduce more fully a little bit later - will go through the updated strategy and our execution. That process will take about an hour or so, and then we'll have about 45 minutes left for questions and answers. So again, a full kind of day. I appreciate your bearing with us, we have a lot to say to you today.
Let me start with the highlights of the year. The highlights are that we met or exceeded all financial guidance in FY05-06, in a difficult operating environment. We had robust performance in challenging European markets. We outperformed in the emerging portfolio are. We continued to have excellent results from Verizon Wireless. On the customer front, we added 22 million new proportionate customers, taking our number up to 170 million proportionate customers globally. We added 10 million 3G customers, and we continued to have good product innovation, whether it was Vodafone Zuhause in Germany, Vodafone Passport here in Europe, Stop the Clock in the UK and the list goes on. In the transactions area, as you know we sold our company in Japan for an attractive price and we're returning those proceeds to our shareholders. We expanded our company in Romania, India, South Africa and Turkey, expanding the exposure to emerging markets which we think are increasingly important to drive growth in our business on a going-forward basis.
From a shareholder point of view, we're raising our dividends to £0.0607 per share, and we're targeting a 60% payout ratio. We're also targeting a slightly lower low single-A credit rating, permitting greater leverage, and we're returning £9 billion to our shareholders via a B share scheme, and these monies will be available to our shareholders after our AGM in August.
Now the highlights from a financial point of view, of the company, are that we grew our customers 15% to a total of 171 million customers. Our revenues grew at 9.6% to £41.4 billion. Our proportionate mobile EBITDA margin was down 30bps, our adjusted operating profit was up 11.4% to £9.4 billion, our free cash flow was £6.4 billion, 2.6% lower than last year, principally because of higher taxes, higher interest and lower dividends from Verizon wireless. Our adjusted EPS was £0.1011, a 13% increase on the back of good growth and a reduction in shares. We met our guidance, whether you include or exclude Japan. I'm going to talk about numbers excluding Japan. Our revenues came in at 9% while we had guided to 8-9%. Our EBITDA margin came in at 30bps lower, while we guided to zero, or minus 100bps. Our free cash flow came in at 6.4, which was slightly ahead of our guidance, and our capex came in at 4, which was exactly in the middle of our guidance. We hit our capex guidance while meeting our 3G targets and building 60% of the population.
If you look at the results on the basis of our new regional structure, Europe is growing at 4.9%. This includes the very good performance from Spain, and our margins were off 30bps. Our new EMAPA subsidiary grew at 18.2% while the margins were 1.3% lower because of higher growth. The US was hitting on all cylinders, when we grew revenues at 16% and actually increased our margin by 50bps. Other associates - which is principally France - grew at 13% and the margins were down 3%, principally on the back of (bill and keep?). Our One Vodafone program is on track to deliver. You'll remember One Vodafone has two components, it has a revenue component and a cost component. I'll be talking about the revenue component, Andy will be talking about the cost component.
You'll recall that our target here is 1% revenue market share improvement versus our competitors by 2007/08. Let's look at the results. In Germany, we had a strong Q4, and our revenue market share in Germany improved by 1.1%. Italy, which saw some very aggressive pricing, grew at 50bps. Spain, that's having an outstanding year, grew at 4.2%. In the UK we went backwards. In the UK as you know, it's a very competitive market. In particular, T-Mobile launched some tariffs that we were unwilling to follow. Therefore we had a growth versus profitability trade off in Q4 and our revenue market share is down. We will be refreshing our prepaid and our contract products and will be coming out in the coming weeks and months and we certainly hope to correct that. We certainly intend to be more aggressive here in the UK.
In the US, we continue to perform well, even though the US is not part of our One Vodafone program. We're showing this to you because it's an important part of our overall economics. We've built a strong 3G platform that positions us well. Without Japan, we had 7.7 million customers as of March 31st. The key services that we're providing are around music, Mobile TV and big bundled minutes. Our coverage is now approaching 60% and the uplift in ARPU is 5-8%. As we think about the year coming up, there are some new and improved services on 3G. We'll be deploying and lighting up HSDPA this summer. HSDPA, you'll remember, is about four times faster than 3G. We'll have some good business products, mostly around laptop computers and embedded chips that will have our HSDPA product in them. Around consumers, we'll have Radio DJ, improved Mobile TV and services like Google Search. The most pleasing thing I can say to you about our 3G so far is that 3G devices generated 10% of the revenues of the firm in the month of March. It's an important milestone; we're making progress.
A few specifics on each of our major countries. In Germany, despite very competitive markets, especially at the low end, we have returned margins that are up year on year by 1.5%. As we think about what we're going to do in Germany in this coming year, it's going to be around 3G. It's going to be around bundles and Zuhause, and Fritz Joussen will come along in a few minutes and tell you about how he's going to add DSL to the Zuhause. In Italy, again a very tough market - very competitive from an incumbent competitor - we had very good revenue and profit production in Italy. Our focus here is going to be on a home zone product called Casa. We'll continue to make sure that our high value customers stay with us. In the UK, while we have the number one revenue market share, the number one EBIT market share, as I said earlier it is a difficult operating environment. We will refresh our products and we will be coming out with new prepaid and contract offers in the coming weeks and months. We intend to regain our revenue market share leadership as defined in the One Vodafone program, in the next 12-24 months.
In Spain, our company continues to perform very well, but you can expect more competition in Spain as the year goes on, principally on the back of MVNOs. In the US, whether it's the top line, the bottom line or virtually any KPI you can think of, our company performs very well. The US continues to benefit from low penetration and the benefits of recent consolidation. The board has authorized a significant increase in dividends, based on strong performance and expectations of good future cash generation. The full year dividend will now be £0.0607 per share, which is a 49% increase, and represents a 60% payout. In the future, the growth in dividends will grow in line with the underlying EPS. The board has also authorized a special distribution of £9 billion in a B-Share scheme. £6 billion comes from Japan and £3 billion comes from increased leverage as a result of adopting a low Single-A credit rating. We returned £9.2 billion in 2005/06, and between share buybacks in 2004/05, 2005/06 and the special distribution, we would have reduced the total number of shares in Vodafone outstanding by 20%.
We are reiterating our outlook for revenue and EBITDA. Our free cash flow for this year before one-time tax settlements is likely to be £5.2-5.7 billion. This is slightly lower than the £6.4 billion that we just reported, principally because of higher interest costs, higher normal taxes and higher capital expenditures. We're expecting our tax settlements and interests to be in the ballpark of £1.2 billion so the net reported free cash flow is likely to be £4-4.5 billion. Our capex is likely to be between £4.2-4.6 billion and it's higher because of the inclusion of some new subsidiaries, principally Turkey.
In summary, we've delivered on our guidance in difficult markets. We've hit our key milestones on 3G. We've structured the organization to deliver on local and regional scale benefits. We sold Japan at an attractive price. We're committed to returning £9 billion in August. We've set our dividend and balance sheet policy to underpin the strategy that we'll talk to you about a bit later, and we're focused on delivering value from Vodafone's unique assets. Those are the highlights of the year. I now want to invite Andy to come up and talk about a full financial review.
Andy Halford, Chief Financial Officer
Right, good morning everybody. First of all, I'm going to focus primarily on the statutory numbers. I think increasingly as I look at the business, that to my mind is more informative than looking at the proportionates. Indeed, for next year, we will guide on the statutory numbers only and we will provide that guidance in May of next year rather than in November as previously. The chart in front of you here, I've endeavored to split into two parts, the top part to look at the ongoing activities of the business and the bottom half to separate out the one-off impairments charges that we announced earlier in the year, and the results of the Japanese business, which under IFRS are shown as one line; discontinued activities.
The key headlines here: reported revenues up 10%, on an organic basis 7.5%. The adjusted operating profit up a headline 12.5% and on an organic basis, 11.4%. The EPS, as Arun has mentioned, up 13% to £0.1011. Roughly half of that increase has come from operational performance and the other half has come from the share buyback program. Let me turn then to the mobile businesses within that. Headlines here, organic increase in mobile revenues of 6.7%. On a proportionate basis that was 9% but on the statutory basis 6.7%. The overall operating profit from the mobile operations, organically up 10.3% with growth of 8% in our control businesses and 17.5% in our associates. I'll give more details on those in a minute.
Let's now turn to the revenues and first of all look at this on a country split. You can see here two distinct groupings, firstly the more competitive, more regulated markets - Italy, Germany, the UK - where the revenue growth has been relatively static, albeit depressed a bit by termination rate cuts. Of course Spain did very well as well. Then separately, the other markets, Eastern Europe, Middle East and Africa, which have grown very, very strongly. Hence you can see the sort of rationale for why we split the group into the two regions that became effective on 1st May. If I now move on and look at those instead on the basis of the products that make up those revenues, a year ago our messaging and data products were 15.5% of our revenues. This year they were 17%. Overall the revenues from voice were up 5.3% on an organic basis. That would actually have been around 8% if we had not had the impact of the termination rate cuts.
Messaging grew by 10.6% and the data revenues grew by an impressive 60% to just over £830 million. Let's just explore some of those trends at a further level of detail. On the left here, we have the outgoing voice trends and on the right, the incoming voice trends. Let me start with the outgoing. Overall, the organic increase here was just over 8%. That comprised 16% more customers. On average, a 6% increase in use per customer, particularly strong in Germany and in Spain, offset by an 11% reduction in the rate per minute. Targeted promotions like Infinity and Happy Options have showed positive elasticity, but that was not sufficient overall to impact and offset the impact of price declines elsewhere in the markets. On the incoming sides, overall organic growth was just under 1% down. That comprised a 12% reduction in the rate per minute, a 3% reduction in the usage per customer, offset by the significant increase in the overall customer base.
Other voice revenues, up 0.8% to £2.6 billion. Two thirds of this came from roaming. As you know, about a year ago, we launched the Passport product, which at the end of the year had 6 million customers. We saw strong elasticity with those customers, so whilst the rate per minute declined strongly, we saw the usage coming up, depending upon country but by fairly similar amounts. In the next year we have indicated we are going to further reduce the prices on roaming, so in April 2007, our roaming rates will be 40% lower than the rates in the summer of 2005. So we do expect a slight reduction in the overall profitability of roaming next year. But there should be offsetting factors in terms of the volume increase that we have seen with Passport and also the reduced costs that we pay to other network operators. Messaging and data are both growing strongly.
On the data front, £832 million of revenue, up 60% on the previous year. About one third of that is coming from business applications and two thirds coming from consumer applications. We now have 27 million Vodafone Live customers and 7.7 million 3G devices in the market. We have now had many months of tracking the ARPU trends of those 3G customers, comparing them with their usage patterns before they took their 3G devices. Now we are through the early adopter phase. We are seeing, as Arun mentioned earlier, that settling to around a 5-8% uplift, compared with their previous spend patterns, albeit on average a 3G customer still has got a higher ARPU by about 50% more than a 2G customer. In the year in total, we saw £1.6 billion of our revenues coming from 3G devices. That was 5% for the overall year, 10% by the end of March, so the run rate is going onwards. Typically those customers had about double the proportion of data in those revenues to the average for the whole of our customer base.
Moving on to EBITDA margin, there's been a very strong focus this year on the margin. A 41% statutory margin, only 0.3% down on the previous year. You can see, the biggest increase here was in the area of retention costs, where we had an increase again in the volume of upgrades. But we offset that in the acquisition area with reduced subsidies and with an increased mix towards the lower subsidized prepay products. So overall, the two came down relatively flat. For the margin for the 2006/07 year, we have guided to that being around 1% lower still, reflecting our determination to protect and indeed enhance our revenue market shares in the principle markets.
Now, a couple of words on One Vodafone. I think most of you are aware that about 40% of our total costs are operating expenses, including payroll, these have been the subject of our One Vodafone program over the last couple of years. If we strip out the operating expenses of the controlled businesses - we started with 16 but through the two divestments now have 14 - you can see that the compound rate of increase in our operating expenses over the last two years in our 14 controlled businesses is now down to 2.4%. That compares for the same businesses with revenue increases of 3.6%, customer increases of 13.7%, minutes increases of 17.1% and is against a backdrop of about 50% more 3G base stations. Put in other words, our EBITDA margin over the period would have increased by about 1% as a consequence of the operating expense efficiencies on their own. I'll talk more about One Vodafone in the strategy session later on.
If I move now onto adjusted operating profit, the adjusted operating profit, as you can see here, again I've shown the organic numbers here on a brand royalty recharge exclusive basis. We changed the brand royalty recharge during the period and that has obviously distorted the effects, but overall, you can see that we've got two groups of businesses here, again those that are more mature and more competitive and secondly, the emerging markets which have shown strong growth during the period. Just to talk a little bit about the associates, the associates operating profits here under IFRS are shown after tax, interest and minority interests. You can see their growth was 17.5%, very strong. The underlying increase in Verizon Wireless was 24% and France was 14%. In total on a pretax pre-interest basis, the associates now account for just over 30% of the Group's adjusted operating profit.
Moving now onto tax, 30.4% effective tax rate, the same as we had at the half year, up about 2.6 percentage points on the previous year, primarily due to the non recurrence of some German tax reorganization cost benefits we had in the previous year. Nonetheless, still below our weighted average tax rate of mid-thirties percent, primarily because of an Italian share buyback we did during the year and some one-off tax settlements. Next year, we expect the effective tax rates to increase by a similar amount again, reflecting the lack of those one-off items. Regarding the £5 billion that I talked about at the half year, there has been relatively little change in those, either in a positive or a negative direction. They're mostly still in discussions with revenue authorities. We have indicated that we're expecting about £1.2 billion of settlements, including interest in the current year, and we are accruing interest on those rates of about £300 million per annum.
Free cash flow was £6.4 billion excluding Japan and £7.1 billion including Japan, just above the range we indicated for the year. You can see here that the overall increases were very, very strong. Next year we're expecting, as Arun mentioned earlier, to be slightly lower than these numbers, primarily because we'll have taken more debt on for the funding of the shareholder returns. We will have slightly higher normal tax payments and we will have the extra capital expenditure primarily in Turkey in the year that we're now in, compared with last year's. Overall, £5.2-5.7 billion range before the one-off tax settlements, about £4-4.5 billion after those settlements. On net debt, we closed the year with £17.3 billion of net debt from continuing operations, an increase of 56% in the year. Net, we spent £4.4 billion on new businesses, but we spend over double that, £9.2 billion, on returns to shareholders. As Arun has said, we have after some deliberation decided that the best route to return the what was previously £6 billion and is now £9 billion back to shareholders, is through a B-Share, which will enable some tax flexibility for some of our shareholders and we will do a share consolidation off the back of that so we will hopefully end up with a base share price in a similar area to that which it is before that. A circular will go out in the middle of June, that will go to the EGM which will take place at the time of the AGM and those monies should be returned in early August for those who want them back then.
In fixed asset additions, £4 billion in the year excluding Japan but including about £0.3 billion from the Czech Republic and Romania. As you can see from the chart, the tallest part of this is other mobile, that's £1.3 billion, that is 13 businesses, on average spending about £100 million each. Capital intensity is about 13.8% overall and I'll talk in the strategy session about how we're going to get to the 10% target. At the end of the year, we had 33,000 3G enabled base stations covering nearly 60% of the population. In 2006/07, we expect the capex to go up to £4.2-4.6 billion, reflecting the extra spend in Turkey.
In summary, there's no denying we're operating in some increasingly tough markets during the course of the year, but nonetheless we have still achieved or exceeded the guidance ranges we gave out previously. We've also delivered operating expense efficiencies that have enabled us to maintain margins, notwithstanding those competitive pressures. Indeed, in many of the markets in which we operate, we have actually increased our share of the EBIT profit pool of our established competitors. Finally, we have returned 129% of our free cash flow to our shareholders by way of dividends and share buybacks. With that, I will hand back to Arun.
Strategy Update Presentation
Thank you, Andy. We're now moving to the second phase of the agenda, which is around strategy. I'm going to introduce this section, talking a little bit about the competitive environment and the key strategic elements of our updated strategy. I'll then have each of my senior colleagues come here and tell you more about how we're actually executing this strategy. First up after me will be Bill Morrow, who'll talk about the European region and what he's doing there. Following him will be Paul Donovan, who's the Chief Executive of EMAPA. He'll be telling us about what's going on in our emerging markets and our affiliates. Following him will be Tom Geitner, who'll talk about our new businesses, Mobile Plus, Internet plus broadband plus mobile, what does it all mean and how are we prosecuting this space. Then Fritz Joussen will come up next and talk about how we're executing Mobile Plus in a specific country. Then Andy will come back and kind of rack it all up for us and talk about what this means in terms of our financial policies. I'll summarize, and then we'll open up for Q&A.
You're probably well aware of the changing industry dynamics and the only thing I'd like to reflect on is the fact that actually, the pace of change is increasing very rapidly in the mobile industry. If you look at our customers, they have a variety of ways of communicating today. It's not just fixed lines and mobiles, but you can go on the Internet, do Voice Over IP, do IM, do a number of things. Equally, because of Internet players, there is a change in the business model and we're finding that our customers want value and they want simplicity. There's some big changes from our customers point of view. Clearly there are some new technologies that are coming down. Whether it's VoIP or Wi-Fi or DSL or whatever it is, there are a number of things that are happening that are enabling new ways of communicating. We have to think about how we introduce these new technologies into the mobile company that we are.
Competitors. We've been talking about competitors all morning long here, whether it's incumbents, whether it's MVNOs, whether it's at the low end, whether it's at the contract end, they're all coming at a much faster pace and reducing the prices in our industry. Clearly, there's integration of fixed mobile and finally again, with the introduction of Internet players such as Google and Yahoo, with Google Talk and Yahoo Go and Skype, we find that the business model is changing. We find that we have to stay one step ahead so that we don't get disintermediated from our customers and not be in the middle of the communications game.
Regulators, equally, are looking at our business very carefully, whether it's termination rates, whether it's roaming, you know all about that. The fundamental point is, if you're in the mobile business today, you're feeling these pressures and these pressures will only increase over a period of time. The new realities for the mobile industry is that competition is intensifying and that there is significant price erosion and that in the near term, the elasticity is less than one. Even though we're putting our products that on the margin have greater than one elasticity, when you look at the whole market, actually the elasticity is less than one. Customers clearly have many more choices in the communications world. Customers are demanding more broadband. Emerging markets are going to deliver a significant portion of the growth in the future. Fundamentally, the business model in mobile will continue to change.
When you look at these new realities, the question is there are clearly some challenges, but clearly there are some opportunities as well. The question for us is, how do we stay one step ahead of the game? It's fantastic that in the last 12-24 months, we've outperformed our competitors. That's good, but that's history. The question is, how are we going to do it again, a year from now, two years from now and three years from now. That is what our strategic objectives are about. We believe that there are five things that Vodafone has to do really well to be successful in the coming years. The first thing we have to do is we have to reduce costs and stimulate revenue in Europe. The second thing we have to do is deliver strong growth in our emerging markets, taking the benefit of under-penetration. The third thing we have to do is deliver solutions for the total communications needs of our customers. If that means integrating mobile with DSL with Internet with broadband, we need to do whatever it takes to satisfy our customers' needs. Fourth, we have to actively manage our portfolio and maximize returns to our shareholders. This will require rigorous M&A discipline. Finally, we have to align our capital structure and our shareholder policies to this new strategy. Those are the five things that we have to do. That's what the discussion for the remaining 55 minutes is going to be about.
First off, as you know, about a month ago we reorganized the company. We created regions, because each of these regions has a very different remit. The first region we created was the European region, which is led by Bill Morrow, who is the Chief Executive of this region. As you know, Bill was our Chief Executive in Japan and prior to that, he was our Chief Executive in the UK. He's been in the business 20 years so he knows this is a business where cost reduction and revenue stimulation are key.
The second region we created was the EMAPA region, and Paul Donovan is the Chief Executive. You'll remember Paul Donovan as the Chief Executive of our OVS subsidiaries and prior to that, he was Chief Executive of Ireland, and he's been in the business and surrounding businesses also for the last 20 years or so. His charter is principally around making sure that our emerging markets businesses outperformed business case, and outperformed our competitors. Finally, we've created a very different business unit that we're calling Mobile Plus. Tom Geitner is the Chief Executive here. Tom, you'll remember, was our Chief Technology Officer and prior to that he was involved in our brand and he was involved in Vodafone Live. He also has a 20+ year career in the business.
The point here is we've reorganized so that we can actually execute against the things that we're talking about. In Europe, as I've said, cost reduction is absolutely key. This is not to say we haven't been doing cost reduction over the last several years. We have. But this is about taking it to a new level. We're now talking about outsourcing certain functions, principally IT. We're talking about shared services, sharing networks with other network operators, it's about reducing overhead. Today we've announced that we will reduce 400 people from our corporate headquarters, principally in Marketing, some in Technology and some in Group Services. These are things we haven't done before. These are things that we have to do now so that we have an appropriate cost structure in a competitive market where prices are falling.
Cost reduction is not the only thing we're doing here. We also have to stimulate our revenues. This is not to say that we haven't stimulated our revenues in the past. We had 3G, we had bundles, but here as well, we're doing new things. We have to introduce products and services such as Vodafone At Home and Vodafone At Office where essentially, when you come to your home, instead of being charged mobile rates, you'll be charged fixed line rates. Whether you're at your home or you're in the office. We have to step up the various things that we're doing. HSDPA is a good enabler for us to do some things in the broadband space. Bill will be telling you a whole lot more about this, so I'll move onto the second strategic objective.
In the past five years, we've had the right assets, because Europe and the developed markets were where most of the growth was. But if you look at this chart and look at the next five years, emerging markets are going to be growing at three times the rate of our more developed, mature markets. We have an excellent presence in this area. We have developed this presence over the last couple of years. We intend to now make sure we press down really hard, outperform our competitors, make use of these growing economies and make sure that we can extract value for our shareholders. Paul will be talking to you about all of these areas in the next few minutes.
Moving on to the third strategic objective, Mobile Plus. Like I said, our customers can now communicate in many different ways depending upon what technologies they use. They can use our technologies, they can use DSL, they can use Wi-Fi, and the key point for us is that we want to stay in the middle of our customers' communications needs. We may have other aspirations on the margin around entertainment and the kinds of things we do at Vodafone Live. But our core business is communications. We have to make sure we can satisfy our customers' communications needs. How will we do that? There are going to be three flanks to our strategy. The first flank is really to address and attack the fixed line markets much more with these At Home and At Office products. The fundamental point here is we're trying to capture minutes from the landline and move it over to wireless. We now have 3G networks that give us lots of capacity. We're completely comfortable doing this at this stage.
The second leg here is around making sure that services that people are beginning to like and love on their PCs are available on their mobiles. Let me give you one example: instant messaging. If you're doing instant messaging and you've got a buddy list and all of that, we want these instant messaging buddy lists to appear on your phones as well so that you can be interacting with your friends whether you're on a mobile phone or on a PC. The important thing for us to do is so that we are in the middle of the communications flow.
The third thing we want to do here is create advertising revenue streams. We have 170 million customers. There is an emerging online advertising business model. Again, a la Google, a la Yahoo, and we have to find a way to monetize this and create new revenue streams. We intend to do this in the next one to two years. Everything I've said is all about being mobile-centric. That's the core. On the margin, we may buy some DSL on a resale basis from other people who provide DSL, that's fine. We're not interested in fixed lines, we're not interested in putting down money in DSLAMs. We're simply interested in buying and reselling DSL as a package for our customers. We're targeting around 10% of the total revenues of the firm to come from these kinds of activities in the next 3-4 years.
You may ask the question, OK, that sounds pretty good, but why is Vodafone going to be successful in this area? Our view is that Vodafone will be successful in this area because customers desire mobility and we're a mobile company. Customers desire personalization. A mobile phone is as personal a device as you can get. We don't have a fixed line burden. We're not trying to protect any profit pool in fixed line. We're large and we're attractive to a number of the partners who are in this space already. Lastly, we're technology agnostic. If we have to buy DSL, we'll buy DSL. If we have to buy Wi-Fi, we'll buy Wi-Fi. We'll do whatever is needed to satisfy our customers' needs.
Moving on to strategic objective four, which is around actively managing our portfolio to maximize returns, when we sold Japan, we fundamentally signaled that we believe that local and regional execution is key and that is one of the big changes occurring in our business. We're not attempting a global execution, but we are going for regional and local execution. As we think about the world and the regions that we're interested in - Europe, Africa, Asia - what we are finding is that there are a small selected number of expansion opportunities. We will apply very rigorous M&A criteria to whatever we do here and Andy will be highlighting what that criteria is. Equally, in terms of disposals, we will look at which parts of the business belong in our portfolio and which parts of the business might actually belong in somebody else's portfolio. Obviously, if a company is under-performing, we will look at that that much more closely.
There has been a lot of press reports on the US. I thought I would talk to you about this while we're talking about portfolio management here. First of all, the US is a large market. Our company in the US is performing very well. The results were posted a couple of weeks ago. What's interesting to me is that the incremental revenue share that Verizon is taking is actually increasing. It's at almost 40%. On any measure, Verizon Wireless performs very well. If you look at the graph, what the graph says is every time we or you have looked at what Verizon Wireless will produce, the company actually has systematically over the last 3-4 years, outperformed. In my view, that trend is likely to continue. It's likely to continue because of certain critical mass that exists in our company, in the US and because we're seeing the benefits of consolidation. We can expect good out-performance as we look forward in time.
The board will always consider shareholder value, and it is driven by maximizing shareholder value. Finally, I'd say that Vodafone is a happy shareholder because frankly, the value in this asset has accreted very substantially in the last couple of years. Now, the final page is around a strategic objective around capital structure. What one has to understand about our business is that we've got a maturing business in Europe. We've got a growing business in EMAPA, we've got a growing business in Mobile Plus. We're going to actively manage our portfolio and frankly, we are targeting to deliver profitable growth. With that as a background, the correct capital structure and return policy is what we've outlined already, which is 60% dividend payouts, a low Single-A rating and a £9 billion B-Share distribution.
In summary, the industry landscape is changing. Vodafone continues to outperform our competitors. Strategy has evolved to ensure success. This is really about how we stay ahead of the game and Vodafone is well positioned to deliver. With that, I'm going to ask Bill Morrow to come up and talk to us about Europe and what he's doing there.
Bill Morrow, Chief Executive Officer, Europe
Thank you, everyone, and good morning, everyone. Before I get into presenting the strategy for the region, let me briefly describe what the region is. We have ten controlled operating companies within it, supported by our Global Marketing and Global Technology organizations. The region is home to about two thirds of our employee base and as of March 31st of this year, within the controlled operations, the region represented 70% of our customers, 80% of our revenues and 90% of our cash flows. We do have the advantage of being the largest mobile operator in Europe. It's this advantage that is the basic element of our strategy within the region. Simply put, our primary objective here is to drive our cash flows over a multi-year period. We're going to do so by maintaining our market leadership position. We're going to attack our cost structure, we're going to stimulate revenues and we're going to perfect our execution skills.
Now, as Arun has said, cost and revenue are the priority behind this and I'll outline much of that throughout the presentation. First, experience has taught us many things. One of them is that the primary drivers of continued healthy returns is to be number one or number two in our local markets. As our industry in this region shifts from high to modest growth, customer share becomes less important. The most critical measure is the national relative market share of revenue. This, we believe, is the single most important measure for the economic health of the mobile operator that's in this environment. As you'll see in the table on the left, we are either the market leader, co-leader or the number two. In the number two cases, we're narrowing the gap with those that are ahead of us.
This position does give us superior returns. As the table on the right shows you, we have six of the eight largest companies within the region earning a higher share of EBITDA than that of revenue. A key driver to building and maintaining this revenue share leadership is a strong brand preference backed by superior customer satisfaction. Our strategy here is to continue to stand out as the superior brand. This is going to be driven from differentiated propositions, much like what has gotten us to where we are today, such as Live, Mobile Connect card, Passport and Simply. Complementing these must be competitive service levels and value oriented tariff plans. The table you see on the right is from our most recent quarterly independent survey and it again highlights our leadership in this area.
We've learned a lot about where scale matters and how to make sure that we take advantage of it. Let me give you some examples of how we see this going forward. When you have the scale advantage at the local market level, we can reap benefits such as stronger distribution presence, more effective cost spreading or the network effects of viral marketing. Across a region like Europe, we can gain further advantages by common product development, pan-European propositions or shared services. While less so than the local or the regional, there are still further benefits to be gained from our global footprint. In particular, the purchasing power within supply chain management with the attraction of the world's best business partners. To be sure it's clear, we have the lead and we have the unique footprint. Also to be sure it's clear, we have not yet fully taken advantage of all that there is to offer on the local, the regional nor the global level, but we will.
Now, this gives us the upper hand over our competitors. But in order to monetize this position, we have to readdress our cost structure and we have to push revenues even further. We've already started this with One Vodafone as Arun said, but now we have to address this in increasingly more radical ways. For example, today our operating costs, not counting A&R, represents about £7.5 billion. In most cases, we manage the majority of these costs in-house and we have implemented a number of cross-market synergy savings. Going forward, however, we again have to look at more aggressive options. We have no choice. These include outsourcing major activities, potentially sharing or even jointly building our networks with other local market operators and of course extracting more regional synergies than what we've already achieved thus far today. With A&R costs, which were about £2.5 billion last year, we're planning measure that build on our past achievements. We've begun to systematically segment our service levels and our costs by customer value. We'll continue to acquire more and more customers through our direct channels such as our own stores or online.
Now, this will not only lower our cost structure but it will also improve the customer experience and these two have to go hand in hand. I realize that we're stating the obvious in our strategy by saying lowering costs and improving revenues. I know you're heard some of this before. Let me share five examples in this case of cost, including some observed results and an idea of the potential opportunity that's behind some of these initiatives. I'd also like to note here that this is not meant to be a forecast, but more to give you a feel for what we see as possible. You've heard Arun and I now mention outsourcing. We are currently managing a tender process to outsource a major part of the £560 million that we spend annually on an IT function that we call ADM. We're targeting an annual savings of 25-30% that could come as early as year three, but certainly no later than year five. We already are in advanced discussion with a shortlist of potential suppliers to deliver just this.
In supply chain management, we're moving to a more centralized and active global supply chain system that will take advantage of standardized specifications and designs and further consolidate our vendors. We've already achieved considerable success in this area, as I hope that you've seen, but we expect even more which could give us an annual savings of 8% within two years. Under the regional consolidation opportunities, we're creating a centralized IT organization that's reducing our data centers and further consolidating our system integration and our maintenance suppliers. While some benefits are realized right away on this initiative, this eventually will ramp up to give us a potential annual savings of 25-30% within three to five years. With regard to Group overheads, we're announcing today a plan for a major reduction of over 400 positions across our global functions. In access networks, our current opex spend is about £280 million.
As usage rises and new services are launched, our capacity requirements will increase. We've developed new designs that provide this needed capacity and it does so with a much lower unit cost than we've seen in the past. In some countries, we're more advanced, such as Germany, where we have 80% of our access network is now under this self-built design, but the UK as an example has yet to even start. So as we look across the region on this, we see a potential savings here of 10-15% for certain operating companies within two years. Now, to maximize returns over a multi-year period, we have to do more than just cut our costs. We've been transitioning our revenue growth approach to a much more sophisticated business model. We have been and we will continue to shift from tactical promotions to driving changes in underlying customer behavior. This further satisfies the needs of the customer and at the same time, brings us a different kind of value.
As with our cost initiatives, I'll share some examples with you - six in this case - of what we're looking to do, some results and again a potential opportunity, not a forecast. By accelerating our shift to focus on value share rather than customer share, we've launched a number of specific initiatives that bring greater value to our customers and in turn bring the higher value customers to us. In Spain, for example, our strategy to shift our prepay customers over to contracts has led to 174% improvement in usage and also in ARPU uplift of 66%. Implementing this across to other markets could ramp up over the next three years, to equal to a 2% increase in revenue from the consumer segment and further give us a 5% reduction in our A&R costs. By introducing family plans, we serve the community that's important to our customers, be they friends, families or work colleagues. This is proven to increase both in bundle and out of bundle usage. It's lowered our churn and in most every case it's raised the ARPU.
In Greece, for example, we've observed both usage and ARPU uplifts from this, and now 80% of the families that have signed up for this plan have added at least one new member to the family. In certain big bundle offers, we're beginning to see examples of where elasticity is now approaching one. By rolling these ideas out to the other markets, we see a potential revenue increase that will ramp up to 2% within this segment within three years. The business community is still very much under-penetrating when it comes to mobile solutions. Vodafone has taken the lead here already with our exclusive channel deals and the new handheld business devices. In fact, last year, we saw 164% increase in the number of users with handheld business devices and each of these have had a substantial increase in ARPUs. This could potentially lead to a 6% incremental revenue increase in our business segment over the next few years.
In leveraging our unique footprint, we introduced Passport, the European roaming tariff. This has had greater than expected results whether we look at usage or in the attraction of the higher-end users to our local operating companies. Our business roaming minutes as an example has risen by 15%. We expect this service to easily grow to the targeted 11 million users by the end of this financial year. By bundling multiple services together for the home, we've seen increase in gross ad share and again higher ARPUs. In Germany, 35% of our post-pay base has elected to take these bundles and we see a €2 ARPU uplift as a result. You'll hear shortly from Fritz about the success of Zuhause and we have launched a similar product in Italy that Arun mentioned. We expect to roll this sort of service out to the majority of our European markets within this financial year. Not counting the Zuhause-like substitution products, we estimate at least a full(?) percent potential increase in revenue within three years from these sorts of users.
Again, it's not only the consumer propositions that we're addressing. We're being more aggressive with our business solutions. In Spain, we implemented a unique offer where we now have a half million office users with usage that's 50% more than their business peers. These solutions will potentially provide us with a 2% increase in voice revenues from this particular customer segment. The key network enablers for many of these services require greater capacity, higher bit rates and we have to have a lower unit costs and our wireless broadband networks will deliver just this. As you've seen and heard from Arun, we've already built our wide-band CDMA networks out to nearly 60% of the population and we're now supplementing this with HSDPA. HSDPA will give us four times the throughput speed to what our customers are currently experiencing on 3G. We've also been piloting a number of HSDPA enabled services and we expect this to actually launch some time late summer of this year. Now, these services will address again both the consumer and the business segment and for nearly every data application that we offer, HSDPA will improve that user experience and we think have a net overall positive effect.
To recap, our primary objective in this area is to realize our full multi-year cash generating potential. We'll use the scale benefits and the competitive advantage that's afforded to us by our local, regional and global positions. To offset a competitive reality that Arun was talking about, we’ll use this position to aggressively lower our cost structure and to stimulate additional revenues. We know that we have to out-execute our competitors and we know that they're always going to be trying to beat us but I'm here to tell you that we're well-prepared for those and we're taking action to move this region from strength to strength. With that, let me turn this over to my good friend, Paul Donovan, who will take you through our emerging markets and the strategy behind that.
Paul Donovan, Chief Executive Officer, Central Europe, Middle East, Asia Pacific and Affiliates
Thank you, Bill. Ladies and gentlemen, good morning. In the context of our overall strategy, the role of the EMAPA region, which covers seven Vodafone subsidiaries and all of our joint ventures and associate companies, is really a simple one. It's all about providing a medium term engine of growth for Vodafone. Revenues are approximately £17 billion from 77 million customers across 21 countries and growth this year has been good, in the mid teens of percents. The prospects for continued revenue growth are also good. In EMAPA, we have four key priorities. The first in our controlled businesses is to actually deliver high performance relative to the competition.
In our joint ventures and affiliates, we aim to maximize shareholder value by influencing both strategy and operational execution. We have and we will continue to leverage measurable benefits from regional and global scope and scale, particularly in the areas of marketing and technology where there are opportunities to both increase revenues and to reduce costs. We also will identify and employ the rapid application of relevant best practice to enable local market competitiveness. Of course in the case of new acquisitions, this actually means out-performing our acquisition business plans. Taking our subsidiaries, affiliates and our partner networks into account, we have a truly impressive footprint in emerging markets. These of course tend to have lower penetration and lower ARPU, but not necessarily lower margins. They often operate with very different business models from our core European businesses. In addition to the opportunities afforded by low penetration and growing GDP, they also have the potential not just in mobile but also in the broader communication markets, especially where fixed telecom services are weak or underdeveloped.
We've already begun to actively transfer learning and best practice within EMAPA. Examples of some of our best practice programs are around the consolidation of requirements and demand for low-cost terminals. Network cost reduction in rural areas, mobile banking and payments and the development of propositions that focus on the needs of the many millions of migrant workers living abroad are all specific to the needs of emerging markets. Going forward, we'll continue to develop this theme. One question you might ask us is how are our most recent acquisitions performing in emerging markets and how do they support our strategic direction? The short answer is that they are doing well and have good strategic fit. It's now just a year since our acquisition in Romania and the Czech Republic. Both businesses have undergone a very successful integration into Vodafone. We've strengthened management, we've accelerated investment in infrastructure, we've rebranded both businesses and we've taken advantage of global purchasing power to reduce cost in terminals and in network infrastructure.
The results to date are very encouraging. In Romania, we've reversed a decline in revenue market share, growing revenues overall by 38% and revenue share by over one percentage point. In our first year of ownership, our performance exceeded our acquisition business case by 17%. We'll continue to press for growth in revenue market share as mobile penetration, particularly in the regions, continues to develop. In the Czech Republic, we've grown both market share and ARPU at a faster rate than our competition, showing a 2.2% increase in revenue market share and a 20% increase in revenues. Here too, we've exceeded our acquisition plan, in this case by 11%. Over the next year, we will extend the reach of this business beyond its core consumer and small business segments, targeting further growth from medium and large corporates.
Last week, after a rather protracted approvals process, we completed our purchase of Telsim for just over US$4.5 billion. This business is an exciting opportunity for Vodafone in a market with an extraordinary set of demographics. With population growth running at four times the European average, and real penetration which is just north of 50%, the market has real potential. Our customer base at April stands at 11.6 million and market share of around 25%. Indeed, since the auction last year, the customer base has grown some 60-70% of our business plan assumptions. Not only has the market accelerated, we've also successfully taken share from competition. We've introduced a new and highly experienced CEO, Attila Vitai, who has been running our Hungarian business for the last five years, and we've put in place a strong team to complement local management. Commercially, you'll see us transition from what has been a purely price-based positioning to one which is much more based on value.
We've already begun a significant program of accelerating investment to improve network coverage and quality and also to overhaul our core IT systems. We will move quickly to improve levels of customer service. Only when these programs start to take real shape will we begin the process of transitioning to the Vodafone brand. We will, of course, update you on our progress in Turkey in due course. If you are looking for an example of where Vodafone can compete with and win in emerging markets, you need look no further than Egypt, a business which has grown by 35% in the last year. These two graphs are telling, in that they show that since the end of 2002, while customer market share has only increased by one percentage point, our revenue share is up 9% and in so doing we've opened up an EBITDA margin gap of six percentage points versus MobiNil. This is a really good example of superior in-market execution against an established emerging markets operator.
We recently increased our stake in Vodacom to 49.9% giving us increased exposure to five growth markets south of the equator. In South Africa, the market has grown strongly with penetration up 25% in the last year alone. Vodacom's customer growth is up 49% with revenues up 18% and EBITDA up 22%. For an emerging market, Vodacom has also innovated in data services, introducing Vodafone Live with Vodafone Support introduction BlackBerry and recently launching HSDPA ahead of markets in Europe. Late last year, we acquired 10% of Bharti Televentures. This highly dynamic business has been showing net additions of around a million customers a month in a market which has been growing at 4-5 million a month, the kind of growth rates that we've seen in China. We're the market leader here by revenue and enjoy a three to four percentage point lead over the nearest competitor. In India, there are many opportunities for mutual benefit from our relationship with Bharti, with Vodafone having much to learn in the area of outsourcing and low-cost business models, and Vodafone providing Bharti with products and technology expertise to drive differentiation and in-market execution.
So in conclusion, how then does the EMAPA region support Vodafone's overall strategy? Well the first is to say that we have an engine of strong, organic growth in both Eastern Europe and in emerging markets. But our recent acquisitions support this direction, out-performing both their competition and their acquisition business cases. Thirdly, that we will do all that we can to create value from the relevant application of global scale while aggressively leveraging best practice to really help local operational performance. The final comment is that we'll take a measured approach to future acquisitions only where real opportunities arise. Later on, Andy will share with you both the criteria and the financial hurdle rates for future investments. That's the story for EMAPA, and I'd like now to hand over to Thomas Geitner, who'll talk us through our approach to new business and innovation.
Thomas Geitner, Chief Executive Officer, New Businesses and Innovation
Thank you, Paul. Good morning, ladies and gentlemen. Our Mobile Plus strategy will allow us to address new sources of revenue. We will target revenues and profit pools of what today are fixed line voice and data markets, and the market for advertising. Each of these markets represent about roughly similar sizes to what is the global market for mobile communications. Mobile Plus is a mobile-centric approach to expand our customer relationships from mobile into what, today, is fixed line. In growing beyond our classical focus on mobile, we have, as Arun has already stated, the ambition to generate 10% revenue in the next three to four years, from At Home, At Office and advertising revenues.
Now, Mobile Plus seeks to address four main customer needs. Firstly, the desire for mobility and personalization. In fact, mobile as a technology offers unique capabilities for personalization on the network and on the terminal, capabilities which far exceed what can be easily provided in a fixed line environment. Secondly, access to the growing number of online communities. Third, faster speeds and ubiquitous availability of broadband access to the Internet and last, but not least, the combination of value and simplicity. We've looked at the question, does the customer really expect us to move into service offerings beyond pure mobile? The answer to that is yes, our customers have given us a resounding endorsement to offer them all communication services At Home and in their office. This opens a wide space of potential options to expand our services. Mobile Plus will initially focus around three areas.
As a first priority, we want to extend our service offering to all communications services At Home and in the office to address what today is typically fixed line voice and data-based service. Secondly, beyond the pure access component of that, we will integrate the mobile and the Internet and the PC world at the application level. Our focus will be the seamless interoperability of communications services and we will primarily use the advantages of IP technology to deliver this. Thirdly, we are considering the introduction of advertising-based services to our customers in a way that is attractive and acceptable. The emerging online market is clear evidence to us that customers have accepted advertising as a model to fund services and it has proven to be a genuine revenue model. Fixed line substitution is the core to mobile plus and is the core to address At Home and At Office needs. It will be complemented by DSL and by Wi-Fi. It will address the customers' expectations for flat fees on voice and broadband data and it will be delivered across our markets in three phases.
The first phase will be At Office and home store(?) tariffs all bundled. We plan to deliver and launch these services as Bill has already alluded to, to most of our European markets during the course of this financial year. In phase two, we will complement the voice and mobile-centric SMS offer with DSL, which we plan to resell initially. Over time and as the number of DSL customers will grow, we will on a market-by-market basis consider unbundling. In phase three, when we move to a total communications solution, we plan to have end to end usability across various types of devices and we want to integrate other access technologies such as Wi-Fi. The service offerings to At Home and in enterprises will be delivered segment by segment and in consideration of country-specific situations.
The second focus is PC-mobile inter-working. Our customers spend around 50% of their time online, communicating. So the integration to the mobile services and PC-based communication will give our customers seamless inter-working between what today are largely two separated worlds. The plan is to create seamless inter-working for services which are typical to the Internet, like instant messaging, shared and easier access to email. At the same time, the benefits of mobile will be introduced to the PC world. Security, network-based personalization, access to your personal number and voicemail on the PC, as well as the ability to share pictures and videos between the two worlds. So Vodafone Live will evolve beyond its current approach as a walled garden, and it will embrace more services and it will be accessible and relevant for the PC user.
Our focus is to access agnostic functionality integration which allows us to created fully productized packages for each customer segment, building on two things: the personalization capabilities of mobile and the service creation possibilities of IP technology. In the presentation following mine, from Fritz Joussen, we will see an early example of what will be introduced to the German market based on our existing Vodafone Live in this current year.
I now want to talk briefly about advertising, where we are trialling different approaches. We have all seen the changes to the advertising market since the online world has emerged and we think the mobile industry is now ready to play its part in this transformation and as the leading mobile operator, we are well placed to take the lead. With this second and third point of our strategy, we clearly enter a space which goes beyond our current capabilities. We therefore with respect to execution, look both into investments but also to identifying relevant partnerships which will complement our skills and efforts. Our approach to introducing all-in communications will be different to other parties in the market. Compared to fixed line operators, we will be able to create offers that not only center on mobility, but are free from the legacy burdens of a fixed-line network. As compared to the Internet players, in fact the mobile devices are brought to the market by mobile operators, which will allow us to ensure user experience and interoperability as we introduce new services.
Last but not least, with our existing customer base, Vodafone is the partner of choice for the online world in their attempt to be accessible through mobile. In implementing Mobile Plus, we do not start from zero. We have already building blocks of our future strategy built in our current service portfolio. Some of these have shown us high degrees of customer demand and the possibility for further service innovation. We have very successfully launched the At Home proposition in Germany and you will hear Fritz Joussen talk about it later in his presentation. We call it, in Germany, Zuhause, and the customer response to date gives us much confidence in what you have heard Arun and myself say about how far we can use our brand to offer total communications and address the customer's demand for a fixed mobile substitution solution. In fact, today, we have announced in Germany the introduction of phase two already, namely the bundling of DSL into the Vodafone Zuhause offering, based on a wholesale agreement between Vodafone Germany and our Germany fixed line operator, Arcor.
Wireless office has gone through various steps of evolution, the latest being the introduction of Officina(?) in Spain with more than 500,000 active users already. Now, in summary, there are really two key points I would like you to remember. First, our ambition is to achieve around 10% of revenues from Mobile Plus over the next three to four years. Secondly, we'll initially focus on three areas in order to implement Mobile Plus. Integration between mobile and the PC world, second, extend our reach into the home and into the office by complementing HSDPA with DSL and Wi-Fi, and tap on the online advertising market as an opportunity for further revenue growth. Mobile Plus is an exciting concept and I want you now to listen to Fritz Joussen, who is the CEO of our German mobile business, to show you how we've addressed the early entry into this market in Germany.
Fritz Joussen, Chief Executive Officer, Germany
Thank you, Thomas. Let me now do my presentation and bring to life actually how we introduced Mobile Plus in Germany, what are our concrete plans, what have we done, what will we do immediately, how did it look, how did it feel and what actually will be the financial impacts even this year. When we look on the German fixed network market, it is very obvious that it's a very attractive market. The fixed market and the order of magnitude of the mobile market margins are good. Its share of minutes is still more than 80% and ARPU is very high, €43 per household. We decided, 12 months ago, to introduce Vodafone Zuhause, with significant success to date. We have 630,000 customers and we have them in three product categories. Each of the product categories generates significant ARPU uplift today.
The first category is the Vodafone Zuhause tariff option, on top of a mobile tariff, so one SIM card being used At Home with the At Home tariff. 440,000 customers, €5 ARPU uplift. The second category is Vodafone Zuhause Talk24, a separate SIM, a separate subscription, ARPU uplift €20, 150,000 customers to date. The third one is Vodafone Zuhause Web, our mobile broadband offering, be it UMTS, be it HSDPA, 40,000 customers, €30 of ARPU. All together, Vodafone Zuhause already generates today €80 million revenue, it is 1% of our monthly revenue already today. It is something which is not only future, but is something which is there. On top of that, we see a clear and strong demand for DSL in Germany. When you look at the penetration of DSL in Germany, it's only 25%. It will go up to 60% over the next two or three years. We are at the bottom of the developed countries in Europe so the market is for grabs right now.
When we look at the reasons why people would not buy Vodafone Zuhause today, we also see that 37% of the customers who said 'If you had a fixed broadband offer as part of your portfolio, we would take Vodafone Zuhause'. We know the market is there and we know we are a credible partner of selling. We decided that we will launch Vodafone Zuhause, with DSL, in the third quarter of this financial year in, as Tom said, cooperation with Arcor, Arcor being the wholesaler and we being the reseller for DSL. We will sell it through a systematic approach based on mobile on top of the module is Vodafone Zuhause voice and on top it will be Vodafone Zuhause data. It will be a value approach, competing mainly on user experience and not on price. I want to show you on the next three slides right now how we want to compete on user experience.
In the first one, we have a differentiated user experience and something only we can do reasonable, it's what we call the instantly ready to use feature. If customers come to one of our 1,800 shops, or are contacted by our 500,000 outbound calls per month, they can order right now the SIM card, and the SIM card activation, including the provisioning of the home zone, including the geographical number is provided in five minutes. Let us understand that. As you might know, DSL provisioning takes time and it's usually six or seven weeks in the market. So what we offer the customer right now, that he can immediately use HSDPA as the Zuhause broadband offering and even if DSL is delivered after six or seven weeks, he can still keep HSDPA or UMTS in parallel and use it as part of one flat rate. So it's true carrier independence for the customer. They can use the flat rate either on fixed or on mobile, it doesn't matter.
On the second slide, I want to show you the seamless extension of Vodafone Live. We have 3.5 million active customers on Vodafone Live today. We are one of the most frequented portals, not only mobile portals, we are number one in Germany, but under the number 10-15 of all portals in Germany already today. We will extend the reach right now from the mobile portal all applications customers use, onto the fixed network. There are many services in the mobile world which make perfect sense in the Internet world, be it (mail, very clearly?) or Radio DJ. Streaming radio on Internet is a very popular service and will become even more popular, so we extend our reach from mobile to fixed. Third, we will offer mobile access to reach media, personal content and applications residing on the home PC of a customer when the PC is connected through Vodafone DSL to the Internet. The customer will see, in the Vodafone Live portal, under mobile, an icon saying 'My PC' and he will be able to surf his personal pictures, music, whatever he likes on the PC application. We overcome with it service restriction in the phone, we overcome double data holding in the phone and on the PC. It's a true interlinked experience which customers will see and which only we can provide.
These three contract(?) and user experience differences will generate a good and healthy business this year already, and we will increase our customers from 630,000 today to 2 million until the end of the financial year. Our annualized revenue contribution will go from 80 million to 240 million by then being already in the order of magnitude of 3% of our overall service revenue. This is not three years in the future, this is happening today. In a nutshell, I want to summarize our strategy in respect of fixed to mobile substitution. It is all about extending our mobile market share into fixed. Thank you very much, I hand it over to Andy right now. Thank you.
Thank you, Fritz. So I'm going to pull all of this together by covering four areas. Firstly, the high level financial implications of the key components of the strategy that you have just heard about. Secondly, what it means for our One Vodafone targets. Thirdly, to explain the rationale behind the new shareholder returns and capital structure policies and fourthly, to provide more clarity on the criteria that we'll be using for future M&A activity.
Let me start with the implications of the updated strategy for our financial performance going forwards. If we step back, we've got three distinct areas of activity. Europe: cash generative, increasingly challenging competitive environment, but with potential to extend our reach in the home and office communication environments. EMAPA: our focus is on customer and revenue market share leadership. We aim to progressively realize scale benefits, but will in part utilize these to fund customer growth. New businesses: as Thomas explained earlier, we're at an early stage in the development of the new business strategy, which will vary by country, though we intend at this stage that the focus will be infrastructure light. I will come back to address the implications of these differences shortly.
Regarding One Vodafone, we will continue through 2007/08 to measure the revenue performance of our key European businesses by reference to our target 1% revenue market share out-performance compared with our principle established competitors. With regard to costs, we previously committed to our combined capital expenditure and operating expenses being at around 2003/04 levels in 2007/08 for the then 16 controlled businesses. I am aware that our progress here has been difficult to track, partly due to the visibility of our controlled businesses' share of our total operating expenses, combined with the impact of our M&A activity, and partly because the largest changes to our capital expenditure will occur in the last year 2007/08. Consequently, I have decided that in future we will split out the targets between capex and opex into two parts, both relating to the European business. This is a logical evolution, as One Vodafone, the original businesses, 85% of those are now in the Europe region.
Let me turn to the next slide, which shows you these two components graphically. Firstly, with regards to operating expenses, I showed you earlier that we have now limited the rate of growth of these to 2.4% per annum. For the European region, 10 of the 14 businesses, the growth rate is slightly lower at 1.9%. Excluding the impact of Thomas's new business strategy and excluding any one-off business restructuring costs, we are now challenging our European businesses to hold their 2007/08 operating expenses flat on their 2005/06 (alt turn?), i.e. avoiding around £150-200 million of future cost increases.
Secondly, and again excluding the new businesses area, we will continue with the target of getting to the 10% capital efficiency by 2007/08, which will mean reducing next year's capital expenditure by between £400-500 million compared to the current year. Hence all of the cost initiatives that you heard about from Bill earlier on. Over the four-year period ending 2007/08, this would have the effect of restricting the increase in operating expenses in Europe to just 4% in total. This compares, based on recent trends, with a near-40% increase in our customer base. Put another way, scale efficiencies from operating expenses on their own would add 3% to the Europe region's margin over that four-year period. So the message I'd like to leave you with is that, compared to our original One Vodafone targets, we are now going below flat opex and capex in the Europe region, and we'll be taking £550-700 million out of our costs over the next two years.
Returning to the overview of the three business areas I started with earlier, I will summarize the financial implications for each of these. Firstly, the Europe region. Taking everything in the round, we are targeting to deliver a modest increase in revenues over the medium term. On the costs side, we are targeting flat opex in 2007/08 compared with 2005/06. The net effect on EBITDA margin is that we expect this to slightly decline as the business mix changes. However, with capital efficiency at 10%, we expect to continue to generate considerable amounts of free cash flow. Second, the EMAPA region should deliver strong top line growth for several years, with margins being fairly robust as increased investments in customer growth are largely offset by scale efficiencies. Capital efficiency will necessarily be somewhat higher than in Europe, though it will trend towards 10% in the medium to longer term. This region will become increasingly cash generative in its own right, irrespective of when full dividends start to flow again from Verizon wireless.
Finally, for new businesses and innovation, we envisage this will impact around 10% of sales in three to four years time unless our infrastructure light approach should only require modest levels of medium term investment. More details on this will be provided later in the year. Turning now to shareholder returns and capital structure, it is clear following the disposal of Japan and from the update of our strategy that the business is entering a much more mature phase in its overall evolution, where the focus will be more on operational execution and cash flow generation and less on M&A. The criteria for which I will turn to in a minute. We have therefore decided to make a number of changes to our financial policies to appropriately reflect the balance of mature and growth businesses and the balance of proven and emerging of revenue opportunity. As you have heard earlier and subject to shareholder approval, we will be immediately increasing the dividend payout ratio to 60% of adjusted EPS and applying this to the 2005/06 year, increasing dividends in future in line with EPS, increasing the £6 billion that we are otherwise returning to shareholders from the disposal of Japan to £9 billion, terminating ongoing share buybacks, managing our balance sheet in future in line with the target capital structure of low Single-A, rather than Single-A as presently.
This, together with the one-off distribution, will give us significantly less balance sheet flexibility than previously. Adjusting the closing 2005/06 net debt for the proceeds from the sale of Japan, the return of the £9 billion and the acquisition of Turkey, gives a comparable net debt figure of £23 billion. As you have heard from Paul, we have been very pleased with the progress of the businesses that we have acquired recently and with the prospects for our most recent business in Turkey. Whilst we envisage a lower volume of M&A activity going forwards, occasional opportunities may arise to add value to our business and to improve our overall growth profile. But with respect to mobile businesses, only where the following strategic and financial criteria can be met. Strategically, a target business should consolidate our presence in the existing local or regional market and should enable us to obtain control of the business. Minority investments will only be contemplated where we are both able to exert sufficient control to add real value and where there is a long-term path to control.
In addition to the above, two financial criteria must both be achieved. Firstly, the investment rate of return must exceed the local risk adjusted costs to capital by 200bps. Secondly, it must take no more than three to give years for the return on invested capital to exceed the local risk adjusted costs of capital. These new criteria are at the margin, slightly more stringent than we have applied in the past. Though the recent trading performances and prospects of the Eastern European businesses make them compliant with these criteria.
In summary, whilst there are clearly many challenges in a number of the markets in which we operate, we believe that the strategy we have outlined should enable us to offset them by moving our brand into adjacent or selective new revenue pools. We believe that we are uniquely well positioned to achieve this, because of the sheer size of our customer base, the strength of our brand, our strong cash flows and our unique mix of mature and emerging businesses. Our commitment is that we will refocus the business to exploit new revenue opportunities, aggressively reduce costs, continue to create significant value in the USA and in emerging markets, apply rigorous criteria to future M&A, to invest prudently in infrastructure light telecommunications service enablers and to gear up to increase returns to shareholders. With that, I'll hand back to Arun.
A - Arun Sarin
Thank you, Andy. In summary, I'd like to say that we've had good performance in our FY2005/06 in a very challenging market. We've outlined for you five new strategic objectives that we think will enable us to be successful in the new reality of the mobile world, we've created three principle business units to execute on the strategy, and you heard from the leaders of each of these business units, their plans and what they intend to do. We have aligned our capital structure and our returns, you've heard about that from Andy. And the net of this, for me, as we have superior execution, is that we will be able to deliver profitable growth for our shareholders in the future. That is the summary of our updated strategy. It is a strategy that in some ways builds on the past successes, but most importantly, we want to stay ahead of the game.
With that, I'd like to invite my colleagues up on stage here, please come on up. And we'll take your questions. We are now moving into the third phase of the agenda here. Participation instructions. Let me start with Simon Weedon.
Questions and Answers
Q - Simon Weedon, Goldman Sachs
Thanks very much, Arun. Can I go straight into the detail on the strategy, with one question about your IT outsourcing plans. You've set out what seems to be, in aggregate, a very aggressive target for saving money from that. But historically, I think, the outsourcing experience is that it's not the rebranding exactly of the supplier that saves the money, it's what the guys do when they take control. What is it you're expecting them to do that's different from what you could do yourself, or what you have been doing yourselves, that's going to give rise to that big, underlying saving? The second question is on the capital intensity of DSL, resale or otherwise. I realize you've left your options open, but in Germany you own and control the company that's providing you with the facility. You are, through SFR, increasing your position in the Cegetel or have been recently. So in a sense, in France you're also at least a part participant in the provider of the system. Why is that not the right strategy for the UK and for Italy, where you have many millions of customers and presumably you're looking at DSL resale as something that's going to be substantial in due course. Can you tackle that one? Thanks.
A - Arun Sarin
Simon has the privilege of going first because we're sitting here in Goldman Sachs territory here. For a moment, I thought you were going to ask us all the possible questions that one could ask. I think Bill and I can take the first question, and Thomas, maybe you can take the second question. First, back on outsourcing. The key value is created in two ways. One is first off, there is a large amount of outsourcing that goes on within our companies already. But this is outsourcing using processes but in very expensive areas. We have very big data centers in Germany. What we hope to do in an ADM-like project is actually have some of this outsourcing go to low cost countries. That's where a big piece of the value comes from. The second piece of the value comes from having common tools and practices. When you have operating companies like ours, that have grown up over the last 15 years, we all have our own way of doing IT as opposed to a standard demand-management way of doing IT. That's the second place that One creates real value. I wasn't quite sure if your question had a bit of this in terms of, are you sure this will be successful because others have tried and not quite done as well. I would say we've done lots of learnings from other companies in terms of what it is they did properly that worked and what is it that they did that didn't work. We're taking every measure to make sure that we don't repeat the mistakes. As you know, outsourcing is not a new game. This has been around for 5-7 years and we're now coming on to it. Do you want to add something to that, Bill?
A - Bill Morrow
Yes, sure. I think, I mean first let's look at the scale behind this. There's nearly 9,000 people working on this for us. Most of those are actually outside contractors, but there's still an awful lot of people that are dedicated to this within the Vodafone operating companies. Second, there's about 2,500 suppliers that are helping us with this sort of service. Then if you look at that, the majority of this work is being done, when you look around the world, in the most expensive labor geographical markets. Second, what Arun is saying here, is that is not our core competence. If you outsource it to the right company, that is their core competence and they have that worldwide presence and they can deliver this in the kind of quality controlled measures that we need to have. This is a win-win for both parties on it. As Arun says, we have been in the greatest amount of detail that you can imagine, more detail than sometimes I'm comfortable with, around how to make this successful, learning from the others in the past. We believe that this is very much something that can be done and they're telling us they'll guarantee strong savings from it.
A - Arun Sarin
Thomas, you want to take on the DSL resale question?
A - Thomas Geitner
Simon, you are right, we own Arcor and we indirectly a share of Cegetel, and this is why we know these businesses. In fact, these two businesses are not DSL businesses, they are fixed line businesses, including DSL, with an admittedly fast-growing share of revenue in DSL. But they offer to the customer the full range of fixed line products, voice, basic voice, all the way up to DSL and all these kinds of things. What we want to offer our customers is basically a solution where the customer can continue to use his mobile phone, his mobile single number, his mobile services, and complement it with one fixed line product which is DSL. For that, we don't need to own a country's full coverage of fixed line infrastructure including the whole switching backbone world up to all the DSLAMs. We might end up, when we have accrued a customer base in DSL, where unbundling after an initial phase of reselling is the more economical way of doing it, unbundling it on the back of our infrastructure, but in order to do that, it is not a prerequisite to acquire or to build a fully circuit-switched fixed line infrastructure because that's typically what you get in the marketplace today. We want to really focus on mobile voice substitution, complemented by DSL, plus an application layer that really makes it a seamless user experience, rather than going through all the hassle of integrating two worlds which in terms of customer repository and customer identity, are not really very compatible.
Q - Gareth Jenkins, Deutsche Bank
Thanks. Two quick questions, if I can. Firstly on the dual opex costs involved in 3G. You've talked a lot about costs and I just wondered what's the update in terms of the dual running costs of the 3G and the 2G networks are. What's the timetable for actually migrating everyone over to 3G and switching off the 2G networks or refarming them? Secondly, on capex, the £400-500 million reduction that you're targeting in Europe, can you quantify where that's coming from, where you expect that to come from? Is it including any network sharing agreements that you may or may not sign? Thank you.
A - Arun Sarin
Gareth, let me take the first question first, maybe Andy, you can take the second question. We have previously talked about dual running costs and I have to admit these are hard, because we are running two networks. Many of the components are shared, it's hard for us to cut off and say exactly that this is 2G and this is 3G. We previously talked about a 100-200bps advantage or disadvantage. I don't think there is a huge update to that. I still think that is the number. Obviously 3G is becoming a larger piece of the portfolio. Equally I think it's somewhat premature to talk about 2G being turned down and all of that, because I think that's still several years away. 900MHz refarming is a core issue. It's a core issue because after we've built 60% of the population and as we head to 70%, 80%, 90%, 99%, over a period of time, we will find that 900MHz is actually the right frequency to be deploying WCDMA on. Because it will help us provide better propagation, better rural coverage and we are working with each of our regulators in each of our jurisdictions to give us permission to do that. Now, you will see this be in the public domain in the next 1-3 years.
A - Andy Halford
The £400-500 million reduction in the capex, the biggest single area will be in the 3G space, where having by then got to probably around 65% indoor coverage, our view at this stage is that we don't need to extend the coverage that much further. We'll need to strengthen within the areas that we operate, but to go further than that, the economics probably are going to become a bit more challenging. So a reduction in the absolute level of 3G spend, which has obviously been pretty high for the last couple of years. Secondly, in the IT space, although the outsourcing will primarily have a bigger benefit in the 3-5 year time period, there are a number of things which we're doing in that space on a nearer term basis. Thirdly, with the supply chain team, actually working on the procurement side, again I think Bill referred to this in one of his slides, to actually take underlying costs out. It's really a combination of all of those areas, a little bit more spend on the HSDPA side, but not significant overall and that's obviously starting in the current year. So the current year to next year move will not be too significant on that. But those will be the main areas where the £400-500 million comes out.
A - Bill Morrow
Just to add a little bit to that, when you look at the network sharing side of it that I did mention, as Andy says, about 65% of the indoor population coverage, it becomes very expensive on a per-unit basis or on a return basis to deploy thereafter. This is why we plan to continue our deployment and our coverage so that customers can have the experience, but it will be at a much reduced cost and within the numbers that Andy mentioned.
Q - Gareth Jenkins, Deutsche Bank
Just to come back then, in Europe, and back to Turkey, (inaudible) capex(?), (coming down?) more than the £400-500, or is that?
A - Andy Halford
It's flat-ish, overall, ex-Turkey.
Q - Paul Howard, Cazenove
A couple of questions. Just going back to the US issue, Verizon is very much on record as saying the ball is in your court on the issue of Verizon Wireless. Is it just a case they haven't offered a high enough price for the US? Just following on from that, in terms of shareholder returns, arguably a 60% pay ratio is low going forward. I presume that's a reflection of the mishap(?) between cash flow and earnings, because of the whole (new Verizon markets?). Hypothetically, if and when you (go in that asset?), would you expect the payout ratio to go up significantly?
A - Arun Sarin
Paul, first of all, I don't feel like the ball's in our court. I know Wimbledon's coming up and all that. What I'd say is one, the asset is doing very well. Two, our board is very mindful of the fact that our assets have to perform, and our assets are here for our shareholders benefit. Third, at this stage, we're very happy shareholders. That is the extent of what I can say to you today. On your question about, is your payout 60% because actually you're not getting current dividends from Verizon Wireless and what might happen, frankly I would like to defer that discussion, if it's OK with you, to a later time. If there's a changed circumstance in the future, obviously the board will relook at the facts and determine what the correct payout ratio is.
Q - Christian Maher, Investec Securities
Can I ask two questions please? Firstly, can I just ask whether any thought has been given to splitting the Group up in terms of the mature European assets and then the emerging markets? Then secondly, with your outlook for emerging market acquisitions, are you really saying that you think valuations in the emerging markets have just gone up too much?
A - Arun Sarin
On the first part of your question on splitting the Group, I would say while the European region is doing cost reduction, revenue stimulation and EMAPA is doing - there's actually a lot of things that go back and forth, including the new Mobile Plus strategies and how they all kind of flow into each other. Even though, because we're trying to be transparent, because we're trying to show you the different parts of the Group, we talk about the Group in those terms, actually there are many more interconnections there. So actually breaking the Group, I think, sub-optimizes the firm quite substantially. Sorry, your second question was?
Q - Christian Maher, Investec Securities
Just on emerging markets and your attitude towards prices and you know, is your attitude driven by the fact that you think valuations have simply gone up too much?
A - Arun Sarin
Valuations are going up in emerging markets. As Andy has pointed out, we are now very public with what our financial criteria and strategic criteria are. When we look at the things we've done recently, things like Turkey where we're kind of at the edge, fortunately I think we're performing well there so they'll come nicely into line here. Yes, they are a bit toppy, but different parts of the world are more toppy than others. Things in the Middle East, until very recently, were quite toppy. We've defined very clearly regions that are of interest to us, we've defined very clearly that if we can get (a part of control?) on some of the assets that we have, that will be a good thing, but again at sensible prices. We don't have a big M&A agenda at the firm. To the extent things appear and we can make money for our shareholders, we'll go for it. Otherwise, we are quite happy with the footprint that we have and making sure we're executing well.
Q - Christian Maher, Investec Securities
Can I just ask as a follow up, on Vodacom, where you've got a 50% stake, do you think you can increase that stake?
A - Arun Sarin
As you know, our stake in Vodacom now is 50/50. We went up from 35% to 50%. It was important for us to be at 50/50. Otherwise, we would have been seriously marginalized with a 35% interest. Frankly, we're not clear what the South African government or Telcom really want to do with this asset long term. There are lots of rumors that float around that talk about their interest in selling or buying or any number of things. My view is this is a new joint venture that we've created. I think we have to live in this space for a while before we know how we feel about this. I don't think there's anything imminent here in the near term.
Q - David(?)
Thank you. Two questions, if I can. Firstly, you set out your criteria for minority investments on incremental investments. Do those criteria also apply to reviewing your existing portfolio of minority investments and if they do, do you see that your current investments meet those criteria, particularly in terms of exerting sufficient influence and longer-term paths to control? Secondly, relates to the Mobile Plus, the £3 billion of revenues. It looks as though that could contributed let's say around half of Group revenue growth in the medium term given the targets you set out. Which of the revenue streams you identified dominates that? If it is, for example, DSL resale, do you see that dilutive to Group margins and do you see an investment phase to building up that, lets say £3-4 billion or revenues? Thank you.
A - Andy Halford
On the minorities, where we have existing businesses, we will continue to review the value of holding those minorities versus if there is an alternative of not holding them, to make sure that what we're doing in terms of the bottom line after tax value for the business is in the best interests of the business going forward. The broad criteria we're using there, we will be using as part of that assessment tool. But part of it equally is about what we see as being their operating prospects going forward. In terms of the 10%, the largest part of that is going to be in the at-home environment, whether it comes from DSL, whether it comes from home zone prices or whether it comes from mobile to Internet services. Then the rest of it will come from the office environment, the advertising etc., so I think the biggest space would be in the At Home but not exclusively DSL. Let's be clear, the At Home will be partly HSDPA, partly local pricing and things like that. The margins on some parts of it, like DSL, if we're buying that wholesale, will typically be somewhat lower than the margins we'd enjoy in the rest of the business. Hence why I referred over a period of time to the European margins slightly declining as that business mix changes.
Q - Nick Delfas, Morgan Stanley(?)
Thanks very much. Could you just clarify, on the major markets for Germany, Italy and the UK, when do you expect the revenue decline or trend to turn around? Obviously Q4 was a bit worse than Q3. Do you think that will turn around, or do you expect it still to get worse? As a follow up on that question, if you take out some of the Mobile Plus revenues, like Zuhause, what would the trends in those revenues have been in Q4? How would it change - I'm just trying to get an idea of how it's going to change the existing European business, taking some of those revenues out and putting them into Mobile Plus. Thanks very much.
A - Arun Sarin
Nick, the only example we've given on home zone products is the £80 million number that Fritz put up. So you know, if you deduct £80 million, you kind of get a sense of what the run rate was in Germany without Zuhause, even though there is that complexity of where you're substituting some revenue when you're actually in the home for mobile products. So there is some degree of substitution that goes on between mobile usage and home zone usage. On your question about what is the revenue trend in the European markets, I think the fairest thing we can say at this stage is that these markets, in the near term, because of price compression and lack of elasticity of One, as a whole, are likely to feel some challenge. They are likely to be GDP, GDP minus kinds of markets, until such time some of these other things kick in. Either price elasticity has to kick in or some of our new products have to kick in, or we have to take share for us to grow our revenues here. Very hard to call market by market by market. The number I showed you in my presentation was that in the European market as a whole, we saw revenue growth of 4.9% and this was in basically Bill's area. We're coming down quite substantially from what we performed this last year. In the near term, the trends are a little bit negative, but we do expect with all the things that we're talking about to turn the corner and have more minutes and have more revenue, albeit at a lower margin. Hence the reason for us to emphasize that we're trying to grow the business on a profitable basis. That's the core metric that we're looking at in the future absolute operating profit growth.
Q - Nick Delfas, Morgan Stanley(?)
Can I just ask one other question on instant messaging? Obviously instant messaging as an idea feels a little bit deflationary. Could you just talk about how you envisage charging for that in the future? Thanks very much.
A - Thomas Geitner
They're different charging models. If we talk about the charging on on-net, we clearly, in terms of mobile network, we will look at what we do typically at texts. More competitively charge, obviously. But the other thing is, you know, the key question is how do we get the inter-working between the Internet world and the mobile world. We're looking at various options there and one being to offer subscriptions to mobile users to be able to inter-work with the Internet world.
Q - Kristian Kohn, Lehman Brothers(?)
Two questions if I may. The first one would be on your guidance. You obviously have announced cost cutting measures today. Just wondering how comfortable you feel with your guidance range, if you feel more towards the upper or lower end, where would guidance have been without these cost cutting measures? That's probably the question here. The second one is, you also announced you're moving toward a new credit rating. The question is here, like what happens if Vivendi knocks on your door with regards to SFR. How much flexibility do you want to give yourself to consider these transactions which are quite obvious if the timing is right, in terms of how would you tackle these? Thank you.
A - Arun Sarin
First off, on guidance, I think our guidance is literally a couple of hours old and obviously anything I say is not going to supercede something that we said two hours ago. As you can imagine, we've obviously been thinking about what we're doing in the company and as a whole, the guidance that we've given you is the best thinking on the subject as of now. Obviously as the months go on, if there's any update to our thinking we'll come back and talk to you about that. In terms of credit rating, yes, we are fundamentally low Single-A, A-minus in SNP terms, AAA, if there is a transaction, if SFR was available at the right price, a good price that meets the criteria that we've highlighted for you, then of course we would want to buy that asset. If for a short period of time, we're not at A-Minus but we're at something slightly worse, such as a bbb+, but we're getting cash flows with it and we can come out of it pretty quickly, then certainly we would consider that. What we're saying is that is our target. That's where we want to be, plus or minus a little bit. It depends upon the circumstances we find ourselves in.
Q - Robert Grindle, Dresdner Kleinwort Wasserstein
Not much on Mobile TV in your presentation. Is that proving a slower, tougher business than you previously expected, or are your hopes still high there? And secondly, did Bill say there was a better network design used in Germany that is more efficient and that can be rolled out in other markets? Is that a capex thing or an opex thing? Thanks.
A - Arun Sarin
Bill, you can take the second question, Fritz maybe you want to add something to the Mobile TV as well. The reason we haven't talked a lot about Mobile TV is because Mobile TV is considered as part of 3G and it's one of the offerings there. We've talked a little bit about it. From our vantage point, it is a very important offering. You will see more and more channels coming online. We've only recently started charging for much of Mobile TV and let me get Fritz to give you kind of a local market perspective on it.
A - Fritz Joussen
We have right now more than 30 channels active. It's part of our Vodafone Live offering, as Arun said. We have non-SMS data revenues increased last year to almost 60%, so the overall book here of services is very good. We also announced, together with the other network operators in Germany, for example, a DVB-H trial which we are doing. DVB-H is broadcasting, which you need, then you have mass adoption of service, so we are looking into the future even if it was really mass adopted by millions of users, we believe it's one of the killer(?) services and remain very bullish about the service.
A - Bill Morrow
And the access design is opex saving. There's a little bit of incremental capex in the beginning, but from a cash basis it has a very quick payback to it and has very strong operating expense savings over time.
Q - Fanus(?)
You already network share in Australia. What impact has that had on your profitability and cash flow or capex, more to the point. Then just a point, Andy, I think you mentioned something about an area being cash flow positive even before Verizon Wireless dividends recommence. Is that something that we should be assuming in our medium-term forecasts? Thanks.
A - Paul Donovan
The situation in Australia is that the network sharing deal that we have on 3G, with Optus, has enabled us to launch with a larger footprint than our market share alone would normally have allowed us to do. This is not so much a question of cost saving, although clearly there are cost savings there. It's enabling us to actually be more competitive. Indeed, since the launch of 3G in Australia back in October, this has actually been one of our most successful markets in terms of driving overall penetration. It's a key enabler. A total coverage in Australia is still low by European standards so it really helps us to compete effectively against a superior overall footprint from Telstra.
A - Andy Halford
On the question which I think was on the EMAPA region, what I've said on the cash flows there, I think I said that it will become increasingly cash generative, irrespective of what happens with Verizon Wireless. It's fairly cash neutral at this point in time.
Q - Terry Sinclair, Citigroup
Two easy questions, I think. First of all, had the M&A targets been in place in November, would your board have authorized $4.55 billion for Turkey at that time, based on the plan you had at that time? Secondly, obviously currencies are moving quite strongly and the value of your US asset May be declining in sterling terms. How does your board look at currency translation when it comes to the sell/keep decision there?
A - Arun Sarin
On Turkey, with the financial criteria that we've highlighted, Turkey would have been right at the edge of what we paid for it. What has happened since then is, as Paul's pointed out, the results are coming in a little bit better. So it kind of moves back into the domain more quickly. It was right at the edge. On the US, we generally follow currencies and we obviously have some hedging in place, so that we can have some natural hedges in place. I would say that, at the current time, the currency changes are not a material part of the board's decision-making in terms of looking at our assets and reviewing our assets. The growth there is 15-17% on the top line level. Valuations are increasing at a fantastic rate. The point is currency movements might occur, but they are small and dwarfed in comparison to the value accretion that's occurring in the US.
Q - Terry Sinclair, Citigroup
Can I just follow up on that; would that be symmetrical if you're considering an acquisition, for example, in the Middle East or Asia? Would the relative appreciation of sterling encourage your board to look at a valuation more generously?
A - Andy Halford
When we're looking at either an investment or a divestment, we are looking at local market, operating cash flows, we're looking at what we see as being the trends in currencies and then we're actually saying, what does that look like when you convert it back into sterling? Is it better to stay with the status quo, or is it better to do whatever we're talking about. I think where there is a significant shift in forecast currencies, that will be taken into account in the assessment of the modeling that we do. We will base our conclusions on that, included within the assessment.
Q - Justin Funnel, Credit Suisse
Arun, I notice your comments about Spain, talking about competition picking up. I think there was some sort of news article saying that you were protesting against the proposed regulation of MVNO access in Spain and you were taking somebody to Brussels or something. Can you give us an update on the latest negotiations, let's say with the regulator, on MVNOs and what we might expect over the next 12 months on MVNOs launching in Spain? Secondly, why is France so attractive? It seems to be quite similar to some of your other, more mature assets. Surely Vodafone should be moving away from those sorts of assets toward more growth type things in terms of M&A. Finally, if you were to make a prediction, how many of your customers would you expect let's say three years from now, will be taking a bundled voice plus DSL product?
A - Arun Sarin
I think we'll splice your question. Paul, do you want to take the Spain question? Because you've been leading that effort up until recently. I can take the SFR question, maybe Thomas you can take the voice and DSL question. You want to go first, Paul?
A - Paul Donovan
I think it is clear from the pronouncements of the regulator in Spain that the regulator is heavily pro-MVNO. It's also clear that the situation in Spain in terms of definitive agreements being signed with interested parties is following a very similar and quite protracted process that we've actually seen in many other markets. I think it is our view that by the end of the year, there is likely to be the entry of one or two MVNOs in the market. The key thing I think is that the mobile operators would prefer those agreements to be negotiated on a commercial basis, rather than forced with the heavy hand of regulation. And that, indeed, is where our overall thoughts are headed.
A - Arun Sarin
Thank you, Paul. On the SFR question, I would say we are interested in SFR, only at the right price. As you know, we've got Vodafone Live, we've got many of the things that we have in our subsidiaries operating in SFR in France. It has a good industry structure - better than the average industry structure in Europe. It is slightly under-penetrated, which gives it some additional value. At the end of the day, it has to come at the right price, otherwise we're quite happy with our 44% share. We've got a good dividend agreement. We've got good relationships with management. There's no issue for us to just hold the 44% that we have.
A - Thomas Geitner
With respect to At Home and DSL, we have set our ambition with what we want to achieve with the 10%. Clearly, for both At Home and At Office, we target to design something which is relevant to the majority of our customers, albeit each of these segments compete to other solutions like the fixed mobile conversion solutions in the market. To give concrete numbers at this stage, I think it's a bit too early to say this percentage of customers will take it at this moment in time, but assume it's both going to be in business and in consumer, targeted to the mainstream customer base.
Q - Laura Conigliaro, Goldman Sachs(?)
A question on fixed line first of all. If you're not going for unbundling straight away on your fixed line strategy, should we assume that you'll be lobbying for naked DSL in the markets where it's not available at the moment, like the UK? And if not, how do you really expect to stimulate much fixed to mobile substitution there? Then moving back to the US, sorry to harp on about this, I know there have been a few questions. You have no path to control there, you have no dividend at the moment, few synergies and an apparently willing buyer. Is this just a question of price? Has Verizon given you an indication of how much they'd be willing to pay for your stake in Verizon wireless? When are you assuming the dividend gets reinstated in your calculation of the returns on that asset? Thanks.
A - Thomas Geitner
In some markets, we have already a clear pronouncement of the regulators for the next steps beyond the unbundling to go into naked DSL. We assume in other markets, this discussion will start shortly. Not triggered by us, but by other parties in the market. Clearly we assume, at least in some of our markets, we will be able to build on naked DSL at some stage. But you know, it's not the standard model in the marketplace today and initially, we will work with the reselling models we can get from DSL. We have built that into our business model.
A - Arun Sarin
Andy, you want to answer the Verizon question on dividends?
A - Andy Halford
I think there was a bunch of questions there, weren't there? Obviously, we have got very, very good visibility into that business. We see the business plans for it going forwards and we are constantly looking and monitoring how that performance compares with any other option. As Arun has said, there has been a pretty consistent recent history of out-performance there. Penetration is still in the low seventies percent, with increases there suggesting it will be a number of years before it gets to a 100% penetrated market. Our view is very much that the business has got a lot of potential still sitting there, notwithstanding the issues that you raised, there is still latent value creation that is sitting within the business. In terms of dividends, I'd say if you take the trend on their cash flows, it's a three to four year time horizon that that business on current trends would become debt-free. Then obviously, at that point in time, one would anticipate that there would be some discussion about what would happen to the future cash flows of the business.
Q - Andrew O'Neill, Sanford Bernstein
Thanks. Most of the pricing pressure you're seeing in Europe is really for 2G services. And you're continuing this year, if I could characterize it, as managing against that pricing backdrop, but continuing to invest in 3G. Given that you've sold Japan and the impetus around very rapidly investing in 3G is perhaps gone from that area, there was an alternative strategy available which was to dramatically slow down capex this year and meet some of that pricing pressure. What was it that tilted your stance toward the former strategy?
A - Arun Sarin
Andrew, we've been investing in 3G now for several years. We are 60% done. As we look forward, when we go from 60% to 90% coverage, we're looking at all the things that Bill talked about in terms of network sharing and refarming spectrum, that'll help us reduce the cost. We're bringing out new products and services on 3G, whether it's search, whether it's Radio DJ, whether it's other bundles, whether it's laptop cards etc., we continue to be on the case that says that more and more of our revenues will be generated from our 3G devices over a period of time. It is a continuous journey for us, not a discontinuous journey. I wouldn’t characterize our interests in building 3G here in Europe, something that was heavily influenced by what was going on in Japan. Japan was a very different situation. We had 90%+ coverage in Japan within two years, because PDC and 3G didn't talk to each other. Here, 3G and GSM talk to each other and to a question earlier about how we kind of match that, my view is 2G is going to stay with us for a long period of time, we are trying to introduce new services so that we can arrest the decline of revenues in our mature markets.
Q - Andrew O'Neill, Sanford Bernstein
If I could follow up then, at what point do you feel that the investment in 3G, relative to your competitors who have invested less or have focused on 2G pricing strategies, will start to actually pay dividends to Vodafone? Is this still one to two years away, or is this something that you can see in the very near future?
A - Arun Sarin
Andrew, I'd answer your question in the following way. If you look at our results, even if you look at just Europe, which is mature, revenue growth of 4.9%, 5%, and margins 30bps down, it's very strong results. I think 3G gives us an advantage today in churn management, new products and services, Zuhause. These are all what I'd call 1% kinds of things. They don't show up in a big chart, but on the margin, each one of these things are helping us and they will help us increasingly over a period of time.
Unfortunately I have to bring the Q&A session to a close. I'm getting a signal that says time to close the session down. Thank you all very much for coming. You've heard the story of Vodafone, I appreciate your spending 2.5 hours with us. All the best, and have a good day. Thank you very much.
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