Vodafone Group Plc (ADR) (VOD) CEO Discusses Interim Management Statement for the Quarter Ended 30 June 2013 (Transcript)

Jul.19.13 | About: Vodafone Group (VOD)

Vodafone Group Plc (ADR) (NASDAQ:VOD)

Interim Management Statement for the Quarter Ended 30 June 2013 Conference Call

July 19, 2013 4:30 am ET

Executives

Vittorio Colao – Chief Executive Officer

Andy Halford – Chief Financial Officer

Paolo Bertoluzzo – Chief Executive Officer, Southern Europe

Nick Read – Chief Executive Officer - Africa, Middle East and Asia Pacific Region

Philipp Humm – Chief Executive Officer, Northern and Central Europe

Analysts

Tim Boddy – Goldman Sachs

Nick Lyall – UBS

Simon Weeden – Citigroup

James Britton – Nomura

Akhil Dattani – JPMorgan Cazenove

Jerry Dellis – Jefferies

Stephen Howard – HSBC Bank

Robin Bienenstock – Sanford C. Bernstein

Justin Funnell – Credit Suisse

Nick Delfas – Morgan Stanley

Andrew Beale – Arete Research

David Wright – Deutsche Bank

John Davies – Santander

Mandeep Singh – Redburn Partners

James Ratzer – New Street Research

Operator

Good morning, ladies and gentlemen and welcome to the Vodafone Group Conference Call. Today’s call is hosted by Andy Halford, Chief Financial Officer at Vodafone. Please go ahead Mr. Hal.

Andy Halford

Good morning, and welcome to Vodafone’s Interim Management Statement for the first quarter. I’ll take you through the financial highlights before handing over to Vittorio, who will update you on strategic developments. We will then move to Q&A and for that we’re joined by Philip, Paolo and Nick.

So, let me start on Slide 3, highlights for the quarter. Group organic service revenue was down 3.5% on our normal accounting basis or down 1.3% under the new statutory accounting basis, which excludes joint ventures like Italy. We’ve included both sets of numbers in today’s press release, but I’ll focus in this presentation on the numbers that include our joint ventures as I believe that that more fairly represents the underlying operational performance of the Group.

The 3.5% decline was a slight improvement on the previous quarter. However, excluding the leap year benefit in Q4, our performance deteriorated slightly, partly due to MTRs. We continue to see strong growth in our emerging markets with India up 13.8%, Turkey up 15.5% and Vodacom up 3.2%. However, this was offset by conditions in Europe.

In the U.S., Verizon Wireless continued to perform strongly with service revenue growth of 7.2%, driven by strong growth in number of accounts and average revenue per account.

On Vodafone Red, we have now launched it in 16 countries and have 5.2 million customers. This is helping to drive in-bundle mobile customer revenue, which for the Group was up 9.5% year-on-year.

We’ve made strong progress in our unified communications strategy, having recently announced our proposed acquisition of Kabel Deutschland in Germany and we have signed an agreement to share vertical fibre infrastructure in Spain. This week we also announced through a wholesale access agreement in Italy, we will launch fibre-based propositions in 27 cities by the end of this summer.

Net debt for the quarter fell to £24.9 billion, which is primarily driven by the receipts of the £2.1 billion dividend from Verizon Wireless, and we have now completed the £1.5 billion share buyback.

On Slide 4, we have split out the overall revenue trends by region. In Northern and Central Europe, service revenues declined by 3% and in Southern Europe by 14.4%, reflecting continued economic and regulatory pressures and increased competition in some markets.

AMAP, which primarily comprises of our emerging markets, continue to grow strongly at 5.9% with good growth in customer numbers, data and a more supported pricing environment, particularly in India. I’ll go into more detail on each of these regions shortly.

Excluding MTRs, Group service revenues including joint ventures declined 0.7%. It’s worth noting at this point that for Q2 we expect a similar MTR headwind with further cuts in Spain, Turkey and the Netherlands offset by lapping effects in Italy.

CapEx for the quarter was £1.2 billion and free cash flow was £1 billion or £3.1 billion including the dividend received from Verizon Wireless.

On Slide 5, you can see the impact of favorable FX movements and M&A in the quarter. In addition to this, our new revenue reporting disclosure means that we have now moved away from voice, SMS and data and are instead reporting mobile in-bundle, out-of-bundle and incoming trends, which better reflects the way in which we operate.

Strong adoption of our integrated plans, particularly Vodafone Red, has driven up in-bundle mobile revenue, which now represents 46% of Group mobile service revenues or 56% of our European mobile service revenues. This is being particularly evidenced in Italy as customers have migrated from prepaid to integrated contract offers.

Our plans are also successfully driving usage volumes with voice and data up 9% and 60% respectively. Offsetting this mobile out-of-bundle customer revenue has declined, reflecting the increase take-up of integrated offers and the ongoing economic and competitive pressures in European markets. The decline in mobile incoming reflects the reduction in MTR rates, partially offset by increased voice usage as unlimited plans are causing customers to call more.

Turning to the next slide, let’s look in more detail at each of our key regions. Firstly, Northern and Central Europe, which now accounts to 47% of Group service revenue. In Germany, service revenues declined by 5.1% or 2.8% excluding MTRs. This represents the deterioration on the prior quarter, reflecting increased price competition both in the consumer contract and enterprise segments.

However, smartphone penetration continued to grow, up 11 percentage points year-on-year to 56% and mobile in-bundle revenue increase by 7% with strong demand for our Vodafone Red plans. In order to address the entry-level end of the market we have launched new smart plans focusing primarily on SIM-only contracts and have introduced a new loyalty program for prepaid, with more than 450,000 customers now signed up. On 4G, we have maintained our leadership position with population coverage now at 64%.

Turning to the UK, service revenue trends improved quarter-on-quarter by 2.1% or 1% excluding MTRs. Just as a reminder, this is the preexisting business excluding Cable & Wireless. Economic conditions remain fragile and we experienced further competitive pressure in consumer prepaid and enterprise, which were partially offset by consumer contract. However, contract smartphone penetration increased by 9 percentage points to 76% and we now have 1.5 million customers on our Vodafone Red plans, which represent 16% of the contract base.

Following the integration of Cable & Wireless, we have launched converged offerings and enterprise now represents just under 45% of UK service revenues. Following the successful UK spectrum auctions, we are now on track to launch 4G services later this summer.

Moving to AMAP on Slide 7, which is the second biggest contributor to Group service revenue. In India we are seeing a much healthier environment enabling us to deliver service revenue growth of 13.8% compared to 7.8% in the prior quarter. As a result, India on a service revenue basis has become our fourth largest business.

Smaller operators have continued to scale back their activities and we have been able to maintain our long record of increasing market share. We have also seen less price discounting enabling outgoing voice prices to rise in turn driving higher ARPU.

Customer growth was strong at 2.7 million, in part due to improved processing of subscriber verification requirements and we continue to attract quality customers shown by an activity ratio of 95%.

Finally, we are really beginning to see data take off in India. Data users have grown by 33% year-on-year to 41 million. We now have 4 million 3G data users and smartphone penetration is already at 9%.

Despite positive market conditions, we continue to face several uncertainties on the regulatory front, particularly regarding spectrum pricing and availability. We may see some progress soon as the auction of 1800 and 900 megahertz spectrum may take place later this year.

Moving to the bottom of the slide, Vodacom Group service revenue grew by 3.2%, driven by an improvement in South Africa and a strong growth in the international businesses, albeit at a slightly lower rate. In South Africa, the launch of a new value offering in the market to stimulate voice usage has been successful with a 21% increase in prepaid minutes. This combined with higher data prepaid bundles have offset other competitive pricing pressures.

In International, service revenue grew by 14.3%, which was supported by strong prepaid customer net additions of 0.9 million. M-Pesa is now live in all of Vodacom’s markets and now represents 19% of Tanzania’s service revenue.

So, moving to Southern Europe. In Italy, macro conditions have continued to deteriorate and pricing in the market, particularly on prepaid and enterprise, has been very aggressive. As a result, those revenues declined 17.6%. However, excluding MTRs, our performance was similar to the prior quarter.

Despite these challenges, we reported strong growth in consumer contract mobile service revenue of 8% supported by Vodafone Red, which represents 92% of consumer contract gross adds in the period. We now have 1.2 million customers on Vodafone Red plans representing 49% of the consumer contract customer base.

On restructuring and cost efficiencies, we remain on track to deliver materials cost savings. And on fixed, we have extended our fibre agreement with Metroweb in Milan to a second region and agreed the wholesale fibre access agreement in Italy with Telecom Italia.

In Spain, service revenue declined by 10.6%, driven by continued macro weakness and competition remains intense with the increased popularity of discounted converged consumer offers in the market.

Vodafone Red is performing well, with over half the gross customer additions during the quarter being on integrated tariffs, which helped drive growth in mobile in-bundle up by 4%. Combined with our other targeted propositions, the decline in our customer base has improved.

Our bundled Vodafone Red Plus fixed plans continue to have a positive impact on broadband customer numbers, which increased 43% in the quarter. Our fibre partnership with Orange is on track and we have now signed a vertical access agreement with the incumbent.

Finally, in May, we were the first operator to launch 4G services in Spain, initially launching in seven cities.

Turning to the U.S. on Slide 9, Verizon Wireless continued to perform strongly, with service revenue up 7.2% led by strong growth in the number of accounts and rising average revenue per account. In the quarter, Verizon Wireless added 941,000 retail postpaid connections, an increase of 6% year-on-year. And in total, the Company now has over 100 million mobile retail connections. In addition, over 36% of retail postpaid accounts are now on Share Everything plans.

Average revenue per account increased by 6.4% year-on-year, driven by both increased smartphone penetration, now at 64% to the retail postpaid base and the take-up of 4G services. A third of Verizon Wireless’ retail postpaid connections now have 4G device and 59% of total data traffic is now on the 4G network. Verizon Wireless has continued to maintain its leadership position in 4G adoption having now substantially completed the deployment of its network. The network now covers more than 99% of Verizon Wireless current 3G footprint and is available in 500 markets. This continues to represent a key point of service differentiation.

Now, on to Slide 10 for the Group’s free cash flow and our financial position. We generated £1 billion of free cash flow during the quarter, which was similar to the prior year.

Overall, net debt fell by £2.1 billion to £24.9 billion boosted by the Verizon Wireless dividend received in the quarter. On a statutory basis, which deconsolidates debt raised locally by joint ventures primarily in Australia, the equivalent number was £23 billion.

We also completed our £1.5 billion share buyback program at an average price of just below [£1.80] with actual cash payments of £1 billion in the period.

So in conclusion, our financial position remains strong. As we highlighted at the time of the KDG announcement, that transaction is expected to take our pro forma net debt to EBITDA ratio from 2.0 to 2.4 times. Overall, our balance sheet headroom remains very comfortable.

With that, I will hand you over to Vittorio, who will take you through the remaining slides.

Vittorio Colao

Thanks, Andy. Slide 11, I would like to give you a brief update on our key areas of strategic and commercial focus, firstly, positive news on bundling and on Vodafone Red.

I’m on the top left part of the chart that shows that 67% of consumer contract revenue in Europe comes from integrated plans and we now have over half of our European consumer contract base on such plans.

If you move down to bottom left chart, it shows how this is driving the Group towards in-bundle revenue away from the unprotected out-of-bundle revenues. Over half of our European mobile service revenue comes from bundles, where the contracts are prepaid. This is up 9 percentage points year-on-year and 2 percentage points quarter-on-quarter. These positive trends have been largely driven by the success of Vodafone Red.

Today we have, as Andy has said, over 4 million customers across 16 markets. We are on track to reach our 10 million target by March next year. If you take our largest European markets, Germany, Italy, UK and Spain, Red now accounts for around 14% of consumer contract revenues and – customers and 22% of revenues.

Red continues to be very popular amongst our customers. Across our markets, we have seen an increasing share of gross adds and we continue to see an improving trend in ARPU dilution, although this remains mildly dilutive. And I am pleased to see a continued increase in data usage, which is around twice that of non-Red customers. Now, Red is just not only about voice, SMS and data. We have an increasing number of customers taking plans that include roaming, now over 15% of customers in our four markets.

If you move to Slide 12, you can see how we are also transitioning to what we call a scale data company. You can see here the data traffic growth is accelerating and we are now up 60% year-on-year, driven by both smartphones and 4G. We continue to see an increased take-up of smartphones, 57% of contract customers and 37% of all customers in Europe now have a smartphone. Usage per customer is also increasing. It’s up 26% year-on-year.

Now, not on the slide, but as Andy has mentioned, we are also seeing the take-up of smartphones increase in our emerging markets with penetration in India doubling in the year to about 9%, which is driving an acceleration in India data usage as well up 128% year-on-year. We continue to invest in our networks to deliver a great data experience over both HSPA and 4G.

The chart on the top right shows the progress we have made in upgrading our base stations to support faster 3G speeds to deliver an excellent experience to our customers. We now have 98% of our footprint on 14.4 megabit per second and 49% of the footprint on 43.2 megabit per second.

We continue to see our customers use more data. As I mentioned, average usage per smartphone is increasing and we now have more and more customers on 4G, where the average usage is double that of 3G. 4G now accounts for 15% of European data traffic.

We are making good progress in this area. We are now live in 10 markets after three more launches in this quarter, including the thing I’m proud of, we were first to launch in Spain. We will extend the 4G services to the UK, to the Netherlands, to Ireland by the end of this summer.

So good progress on our mobile network that will help us to continue to differentiate and we are being increasingly strict here on the conditions for new MVNO deals to ensure that our advantage and our differentiation is protected.

Now, moving to our strategy on unified communications, you can also see here that we have made some progress. In Germany, on top of the offer for Kabel Deutschland, which we hope to complete in calendar four of this year or quarter four of this year, we now have a complementary wholesale agreement with Deutsche Telekom and of course we have the 4G offer.

In Spain, our co-investment with Orange is on track, helped by the recent vertical access agreement with Telefonica. And in Italy, we have reached an agreement for wholesale fibre access. In Portugal, we have started the extension of our fibre-to-the-home program, where we aim to double the number of homes passed to around 1 million. And we also have signed a wholesale agreement in Ireland. So, a lot of progress in this area.

Slide 13, my last one, is basically the wrap up. We have continued to develop Vodafone Red, 5 million customers. On this plans today, we have over 10 million by the end of the financial year. Growth in emerging markets has accelerated. We continue to see a strong performance from Verizon Wireless, and both those things partially offset the regulatory competitive and macro pressure in Europe.

We are continuing the evolution of the Group in line with our strategy, with an increasing contribution from our key pillars of growth; data, as you see in the chart is now 18% of service revenue, enterprise is now 27% and emerging markets, the third pillar of the growth strategy, is now 30%.

And I always like to stress this point. We are making the Group more future proof, both in terms of our revenues and our network, the proportion of European mobile service revenue that is in-bundle has nearly doubled in the last three years and Vodafone Red, of course, will help with the drive of this trend further. Demand for data continues to increase and we continue to invest therefore in our network to deliver an excellent customer experience over HSPA and 4G.

And finally, as I just said, we are delivering our conversion strategy with organic and inorganic initiatives.

Thank you for listening. I’m now glad to ask Philipp, Paolo and Nick to join Andy and myself to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Tim Boddy at Goldman Sachs. Please go ahead with your question. Your line is now open.

Tim Boddy – Goldman Sachs

Yes, thanks for the question. I wanted to ask a little bit about what’s happening in Germany, where it looks very much as this new price war is beginning or further intensification, if you could comment that would be very helpful. And secondly, I wondered if you could give us an update on regulation, where it seems disappointing to now sort of perhaps to any concrete proposal, we’ve seen so far is the canceling of roaming fees, perhaps so to say, if you could generally comment on how you see regulation developing at present and just quantify the EBITDA exposure to roaming fees that would be most helpful? Thank you.

Vittorio Colao

Tim, I give you a quick answer on Germany, but maybe its better if Philipp then expands on it, and then if I can I comment immediately on roaming and regulation. So on Germany, I wouldn’t describe it as a price war, I mean to me price war is more what’s happening in Italy that I call price war.

I think in Germany, there is more pressure, O2 has changed tariffs and they are discounting it, plus is attacking more on the low end even if not generating growth for them. And Deutsche continues to subsidize heavily and we have actually increased also our investment in that area. We are still a little bit below them, but of course we cannot let market share slip. But then Philipp maybe will be more precise. Let me go on the regulation point immediately.

I have to say, first of all, keep in mind that roaming is not a huge part of our revenues and a large part of it is outside of Europe, and so of the 6%, 7% which is roaming, large part is outside of Europe, and large part is enterprise, which anyhow we did commercially. It is important we are watching what is coming out of Brussels; of course we are interacting with them. I share some disappointment that once again instead of letting the free market develop, we think regulation and regulation over multi-country as always has the risk of creating wrong unintended consequences and deterring investment.

Having said that, we’re engaged and most importantly as I said, many customers in Vodafone Red now are taking roaming in Europe. 7 million customers take our daily tariffs, so we are proactive in using roaming more to our advantage than to be an area that has to be regulated. Do you want to comment Philipp a bit on Germany?

Philipp Humm

Yeah few words on Germany, we as Vittorio said, we see some price pressure coming from the third and fourth player, and we also see that Deutsche continues to be aggressive on handset offers in consumer and enterprise, and we are obviously then responding to it. Overall, the market is a little bit soft in gross adds, now we’re staying on strategy and start to see some pretty encouraging signs, as we are reaching 1.3 million customers with Red.

We see our ARPUs stabilizing in the consumer area, which is good and we are also seeing first time net positives on contracts, which is also good. So we’re staying on costs continuing to invest in Red, continuing to invest in the network and playing a defense game with our smart tariff rate plan in the lower end to offset a potential inroads from third and fourth player.

Tim Boddy – Goldman Sachs

Thank you very much.

Operator

Our next question is from the line of Nick Lyall at UBS. Please go ahead.

Your line is now open.

Nick Lyall – UBS

Yeah, morning it’s Nick, UBS. Could I ask on the Italian comment you made on the low cost, could you expand a bit on the cost that you might be able to cut from the business, so we could see or at least try and calculate some potential effect on margins for the full year. And then secondly on Spain you mentioned again the access to Telefonica’s vertical fibre. Do you have any idea of what price that Telefonica might be asking first or what price the CMT sets and do you think that’s reasonable? Thanks.

Vittorio Colao

Let me pass the question to Paolo, but let me tell you that by definition whatever price Telefonica asks is never reasonable being an incumbent. So Paolo you might elaborate?

Paolo Bertoluzzo

Yes, on the Italian cost structure obviously we are taking all possible initiatives that do not affect our customers experience in differentiation and competitiveness, which we believe is 100% important to maintaining the market. The areas where we are working and we are already having strong results are obviously the right sizing of our workforce and in particular our support functions including marketing and those which are not facing the customer are delivering clear direct value to the customer. And we’ve just finished a restructuring plan with 700 people existing the Company just to give an example plus unitary cost of labor is going down at the moment through an agreement we had with the unions.

We’re going ahead with network sharing, passive network sharing with all the operators which allows us not to dilute our differentiation on the network side, but still achieve this important OpEx and CapEx for cash cost reductions. We’re pressing ahead on the customer service side, but not reducing the level of service, but actually increasing the level of services through very advanced self-care mobile based self-care, which is giving a better service and higher interaction with the customer, but also making sure that we talk to the customer through our call centers when there is an important issue, and we do it as professionally as possible to solve the problem.

We are also looking at our commercial cost as you can imagine across the board. On Spain, as you know we’ve reached an agreement on vertical sharing, the price attached to the agreement had to set by the regulator, because it was impossible to reach an agreement on these one with Telefonica.

For the moment and is not final the regulator is setting a price which is above €170, which we believe is not the right pricing therefore we are challenging this, as the pricing between Orange and Telefonica as far as we understand is around €150 and therefore there is no reason why it should be higher. And our own view is that the real cost to build, which we’re seeing in our own experience is more around €80, and therefore we are challenging this decision at the moment.

Nick Lyall – UBS

Okay that’s great. Thank you.

Operator

Our next question is from the line of Simon Weeden at Citigroup. Please go ahead with your question. Your line is now open.

Simon Weeden – Citigroup

Yeah, thanks very much for taking the question. A couple really, I wonder if I think you’ve perhaps done it on the cost side, but I noted in the text of the Italian commentary that you’ve referred to commercial performance has improved, and could you elaborate a little bit on what’s behind that and how you see the outlook coming out of the quarter? And second on India, I wonder if you could address the question…

Vittorio Colao

Hello.

Simon Weeden – Citigroup

Hello, can you hear me okay?

Vittorio Colao

Yeah.

Simon Weeden – Citigroup

Okay.

Vittorio Colao

Yeah. You were cut, I could hear India and then I didn’t understand the question.

Simon Weeden – Citigroup

And could you get the Italy question?

Vittorio Colao

Italy yes the Indian one. The Indian one was cut.

Simon Weeden – Citigroup

Okay, so India was regarding spectrum and tax and whether or not you have any concern that the expiry of the 900 licenses and could be used as negotiating elements in the discussions about future spectrum cost and tax cost with the government?

Vittorio Colao

Why don’t I tell you? First of all, the settlement of the tax in India, as you know we are talking about the process that can lead to a discussion, so it’s what is called talks about talks, and I really don’t feel that we can tell you anything more than in good faith and with positive intentions. There are talks there. On the frequency thing Nick, maybe you want to jump in?

Nick Land

Yeah, I do. Let me just talk in terms of spectrum as you probably know the ECom has referred the issue of spectrum reserve pricing and both the 900 refarmings of the regulator. So that right at the couple of months of process and concentration with the operators as well. So I’ll imagine that the auction probably will end up being around November because of course, they’ve got to get it in before the elections early next year. Just to your points of the 900 megahertz spectrum, of course we are legally disputing the fact that they are allowed to refarm it and that will be heard in the Delhi High Court at the end of August.

However, in good faith, we engage with the DOT on the 900 license extension process, and pricing and as you know we put recently a proposal forward on what we felt was a fair and reasonable basis.

Vittorio Colao

Paolo.

Paolo Bertoluzzo

On the commercial performance in Italy, yes, in fact in the quarter just to give you one element that we’ve been positive on net additions in consumer, which was a negative performance on the previous quarter, and this has been enabled by the fact that we have right sized our premium, when the price war began, about a year ago we did tried not to go into it and we let our price premium to increase a lot to try and cool it down, but then we have right sized about four months ago, three months ago and suddenly our commercial performance improved again, it would be in the net positive on portability in the quarter.

Simon Weeden – Citigroup

Great, thanks very much.

Operator

Our next question is from the line of James Britton of Nomura. Please go ahead with your question; your line is now open.

James Britton – Nomura

Thanks very much, I got a few strategic questions around the smartphone cost. Are you seeing any deflation in average smartphone cost yet, and what are the sort of key drivers for this going forward, is consumer interest in the flagship €500 devices starting to reduce and what percentage of your European customer base might be attracted to the Vodafone smart handset range. And then finally is there a natural landmark where you might renegotiate your Apple contract on iPhones? Thanks.

Vittorio Colao

James, I’m not sure I fully understood all your questions, because the line is a bit noisy. On the Apple renegotiation, I would not like to talk too much because these are confidential discussions and of course, the only comment I can make is that there is much more choice in the market today than few years ago and especially at the high-end there are super high performing Android and also Windows phones now. So it is a better situation than the original one, but I wouldn’t comment more than that.

On smartphone price deflation, I would say that there is some deflation. But to be honest, the best thing is that there is much more choice at all levels in the market, and therefore we feel more comfortable that the acceleration or the continuation of the smartphone penetration, which in Europe is progressing well. We’ll continue to progress at affordable or logical acquisition cost. Does that answer your question?

James Britton – Nomura

Yes, the hope has always been that the mass market is drawn to perhaps less expensive smartphones, which might improve your smartphone economics over time. I just wondered whether or not there was evidence of that at this stage?

Vittorio Colao

Yeah, there is a little bit of evidence. But I wouldn’t describe it as a game changer because of course there are cheaper handsets, but also the value of the price of the high-end is coming gently down. So at the end of the day, there are some improvements, but we are not talking about a revolution in the economics of mobile broadband.

James Britton – Nomura

I have one last one on Vodafone Smart. You introduced a few handsets in that range recently, what’s the target market for Vodafone Smart in both Europe and emerging I guess?

Vittorio Colao

Yeah, I guess its people – its fairly simple people who want good very well equipped and faster, which is the real thing of the Smart III phones at an affordable price levels. So youth, so the first time adopter of smartphones and in general people who cannot afford a big commitment. Keeping in mid that what we are trying to do with Red is also to make customers choose the price plan that they need, which could be very generous, and then select how much more they are willing to pay to get a certain handsets.

So you want an iPhone you’re going to pay whatever 10 more you want per month. You want just to have a great data experience, the same generosity of data, the same unlimited voice and SMS, but you are not willing to add another 10 you can still do it with the Vodafone Smart, and you still have one 1 Gig per month or whatever. So it’s a way to enable a lot of data and higher end let me call it, service plans without having to load the cost of a Galaxy or an Apple. So again, good for the mid-segments of the market.

James Britton – Nomura

Okay, thanks.

Nick Read

Sorry its Nick. Just in terms of emerging markets, its probably worth just noting that in terms of price points per handsets on 3G, you go a year back and $100 in India we had no handsets at all. Now we have about eight to 10 handsets, which is really opening up the market, and so you’ll see in that in the data performance, browsing revenue in India was up 70% year-over-year, 3G was up 190% and 2G up 60%. So now 3G is representing 30% of the browsing revenues.

James Britton – Nomura

Interesting, thanks very much.

Operator

Our next question is from the line of Akhil Dattani of JPMorgan. Please go ahead with your question. Your line is now open.

Akhil Dattani – JPMorgan Cazenove

Yeah. Hi, good morning. Just three questions please if I may, firstly on Southern Europe. If we look at the KPI trends that you report, we’ve seen what looks to be some sort of improvement in Spain, Greece, and Portugal in terms of the voice and data traffic trends that you’re reporting. So it’s interesting quite a healthy pickup this quarter.

I’m just wondered if you could comment on what you feel is driving that? Is there any sorts of hope within that Southern Europe is stabilizing or maybe show some signs of improving or do you think it’s too early to make that read across at this stage.

And second question is just in terms of mobile termination rates. If we look at the next few quarters there seem to be quite a few big swing factors coming up particularly with regards to Spain and Turkey. So just wondered if you could walk us through some of the big moving parts here? And help us understand how that might shape the service revenue performance at the Group level over the next few quarters?

And then very finally, we’ve had a few comments from some of the U.S. telco peers in the last few months suggesting that from their standpoint was regulation is clearly very severe in European space, they also feel that European wireless operators are under investing in CapEx. So just came to kind of get your thoughts on those comments and how you think about that? Thanks a lot.

Vittorio Colao

Why don’t I take the last one Akhil and then I pass to Paolo, the Southern Europe one and to Andy the MTRs 1. In terms I don’t know who are the peers who say that there has been under investment in wireless, and I don’t know whether they were referring to Vodafone or not. I mean as far as we are concerned, we don’t think we have under invested anywhere, percentage of investment if anything has gone up a little bit, the absolute amount I always repeated for Vodafone has never gone down even in the years of darker recession.

We have as I said about a 100% of our footprint at 14.4% at least and 50%, 43.2% and I mean I didn’t do it today, but I always report the congestion, and the saturation – sorry the saturation and the average utilization of the network. I didn’t do it today, because it’s boring, because it’s always the same two numbers. It’s always 35 and [7].

So I would say that all objective parameters for Vodafone say that we have a quality network, we invest the right amount and we give the right experience, which is why I said in my earlier remarks we are becoming stricter in our approach to MVNO, wholesale all these deals, because if there is a value, the value has to be more and more under the Vodafone brand. Paolo you want to comment about Southern Europe and Andy about MTRs.

Paolo Bertoluzzo

Yes honestly I believe it is too early to say that we see improving trends in Southern Europe, because the environment remains very difficult both macroeconomic environment and competitive environment. Obviously we are taking action, we are taking important actions in each of the markets, I’ve just commented on Italy, I will give you just a couple of comments on the others Spain we have Red, which is helping a lot in our performance both in terms of acquisition, but also in terms of churn management and ARPU management, we are actually are the good performers on ARPU in Spain plus we are starting to have some positive results on fixed broadband where we are net positive in gaining market share months-after-months.

Greece we’re winning market share in prepaid, which is an area which has been historically weak for Vodafone. Portugal, again, we are learning how to compete in a more convergent market. We are slowing down our losses towards incumbent and most importantly we are starting to see a strong traction in our own fixed offers, in our own fiber based fixed offers in the footprint that we’re building and you see these growing week-after-week. Andy?

Andy Halford

Yeah, on the MTRs, a lot of moving parts Akhil as you referred to in your question. The most significant impacts in the next quarter will be in Turkey, and then in Spain and the Netherlands, offsetting that we’ve got lapping effect of Italy which will give us a little bit of relief. I think the way I’d look at this is, last year we had just over two percentage point drag on our MTRs, the first quarter this year is 2.8. I would be thinking the second and the third quarters remain in the high 2’s and then we should drop down a fair amount in the fourth quarter, next year should be significantly lower. Nick?

Nick Read

To add to this one to specifically to Turkey, I mean we have a strong reduction on MTRs and on SMS and voice, which basically means that we have to expect going forward that the reported revenue will be obviously lower. But overall the move is for us EBITDA accretive. So it’s from an EBITDA point of view actually positive in Turkey.

Akhil Dattani – JPMorgan Cazenove

Thanks a lot, very useful.

Operator

Next question is from the line of Jerry Dellis at Jefferies. Please go ahead with your question. Your line is now open.

Jerry Dellis – Jefferies

Yes, good morning. Thank you for taking my questions. Two questions please. The first one is on customer costs. You mentioned that in Germany the need to defend market share has led you to respond to T-Mobile’s higher handset subsidies. And in Spain, I suppose you’re now back to subsidizing and you’re lapping last year when subsidies were withdrawn for most of the time. So I wondered if there are any markets where customer costs are actually now trending down and whether perhaps these are enough to offset the upward pressures in Germany and in Spain.

And then secondly, just on roaming, there is clearly a very well defined framework for roaming regulation within the EU. Yet there continues to be talk from Ms Kroes’s office and from MEPs seeming to mandate something more aggressive. There’s obviously a resolution to be voted on in the European Parliament in September. Now, the question is really, when you sit down and actually talk to these various politicians outside of the public gaze, what conclusions are you drawing about, what practical measures they might actually be intending to implement. Thank you.

Vittorio Colao

Yeah, I will pass to Philipp, the question on customer cost versus T-Mobile and maybe Paolo, you can also comment about Spain. Just a remark, let’s be careful in not calling elimination of subsidies simply the splitting of subsidies from lower service revenues because I can eliminate subsidy by simply lowering my service intake and then giving to a finance company, the job of selling the handsets. So let’s look at the bottom line, not just at the accounting presentation. But I’m sure Paolo will comment on that.

Paolo Bertoluzzo

Listen, on roaming, I take it again because this is my hobby of these days. Yeah, when you talk to them which of course we do almost on a daily basis at this point. You clearly see that roaming is, I think blown out of proportion if you look at how much customers really travel throughout Europe and how much this is already taking care of with commercial offers like the daily tariff that we have 7 million people on or the Vodafone Red or the enterprise tariff.

You and I, from an objective point of view would get to the conclusion that it is a little bit blown out of proportion. But having said that my impression, our impression is that, over time roaming will go away, it will be more and more incorporated into price plans. The important thing to think we will fight for is to make sure that this does not become either a discouragement to new investment i.e. people would say, why investing when in any case I have to give away at very low wholesale prices my own network nor an incentive to basically kind of launch a European type of maxi MVNO that again does not add any value but simply arbitrages prices across countries.

In all fairness, I do not have the impression that this is the objective of the commission and I have the impression that the commission is very aware that you need to preserve good conditions for investment, but also it’s very clear that they want to find lower prices for people who generally travel. So our strategy will be to try to provide this, so lower prices for people who travel, but not destroying the investment to invest. And this is our, if you want negotiation line. Philipp, commercial cost?

Philipp Humm

Yeah. So, on Germany specifically, as you asked Jerry, our strategy on subsidies is to be a fast follower to Deutschland and we have and we will continue to spend less subsidies per customers than Deutsche does. So whatever Deutsche does, we are following, but we will always command if you want a premium or basically subsidies less than they have, as we believe there we have a stronger brand and a stronger distribution in the marketplace.

Now you ask about which of the costs are improving and to compensate the softness on revenue and actually all costs are improving right now. Direct costs are improving, a lot it volume driven obviously we are also MTR driven, OpEx are improving and our A&R is improving less per unit, but more simply because there is softness in the market on the overall volume side.

Vittorio Colao

A quick comment on Spain, which is also a market which has seen a lot of movement around such a discussion, and I think that probably situation in Spain is always – I have to say is still a little bit confusing or confused, because as Vodafone we have maintained technically subsidy model, but there is a clear distinction between the price for our services and the price for the device that the customer can choose on top of it and therefore we seize more and more SIM only offers from us. Our competitors are trying different models, internal financing, external financing, but then they also add subsidies on top of it depending on the period of the year or depending on the segments.

So I think its still a moving situation. I believe that in any case if you compare the current environment with the environment that we had a couple of years ago before the shuffling started. For sure the unitary cost has gone down and I believe that the market conditions are actually stimulating all the players to continue to go down on this unitary investment side.

Jerry Dellis – Jefferies

Okay, thank you very much.

Operator

Our next question is from the line of Stephen Howard at HSBC. Please go ahead with your question. Your line is now open.

Stephen Howard – HSBC Bank

Thanks very much. I’d just like to, with apologies, return to the question of roaming. I guess we’ve covered this from a number of angles already. But I was wondering if you could just perhaps be a bit more specific about the mechanisms that the Commission is proposing here.

From your remarks a moment ago, Vittorio, clearly one of the options that seems to be on the table is demanding, yeah, lower wholesale roaming rates. But have they put any other options in front of you or alternatively have you had any counterproposals for them that might take this issue forward into a more market-friendly mechanism. Thanks very much.

Vittorio Colao

Yes, Stephen, first of all keep in mind that we are talking about internal assumptions of different position. So nothing is cast in stone yet and keep in mind that we are talking about informal consultations and comparison of different positions. So the answer to your question is, yes, I think we have a very clear idea of where we’d like to go and to some extent, I think we have already indicated where we’d like to go. Because as I said we have introduced daily tariffs, we have introduced take your tariff abroad concept.

We have Vodafone Red with roaming included for the high-end and we have enterprise plans with roaming included. So, it’s very obvious that Vodafone would like to get to a commercial if you want the resolution of the roaming anxiety. But I cannot say what is the position of us, and then – and other operators, because these are very fluid talks at this stage.

Stephen Howard – HSBC Bank

Okay. Thank you.

Operator

Our next question is from the line of Robin Bienenstock of Sanford Bernstein. Please go ahead with your question. Your line is open.

Robin Bienenstock – Sanford C. Bernstein

Thanks very much. Two questions if I may. I guess first, isn’t there a fundamental problem with your negotiating position vis-à-vis the EU and that you’re asking for the end of free riding and MVNOs in wireless, but actually asking for more free riding in wireline and doesn’t that kind of cause you a problem? It looks like the current draft actually is giving you the opposite. And then a separate question completely, Verizon reported slightly weaker margins; AT&T has kind of forecast them. So I’m wondering if you’re getting worried about the US market becoming increasingly competitive and whether or not that diminishes your desire to own those assets. Thanks.

Vittorio Colao

Robin I hope, I will answer your question, because unfortunately you came across a little bit noisy. I especially, I think I understood the second one well, it says are we expecting tougher times in the U.S., was this the second point?

Robin Bienenstock – Sanford Bernstein

That was the second point. The first point is, isn’t there a fundamental inconsistency in your arguments vis-à-vis the regulator that you want free writing when it comes to the wireline infrastructure and you want no free writing when it comes to wireless infrastructure and that actually this draft regulation gives you the reverse in both cases.

Vittorio Colao

No, no, no. Robin I totally and strongly reject your definition of free writing and I almost do it idealogically, Vodafone is the result of opening to competition and is the result of an investment, courageous investment strategy country-by-country in Europe and outside of Europe. No issue whatsoever and we always have demonstrated it in competing and competing with anybody who gets decent conditions, we have no problem whatsoever with the fixed line operators having to get good returns on their investment, I always said I’m actually happy if they have a very good return.

The problem is of course, equality of competition and avoiding price squeeze. So I would say that’s actually contrary to your statement our position is absolutely consistent, we say mobile is competitive, mobile is open, people can access networks at very competitive rates, there is no need to get into regulated prices. Fixed where it is less competitive where there are dominant infrastructures, where there are naturally monopolistic infrastructures, we want fair conditions to be able to play the game.

And I have to tell you, we are completely supported in this position those who few months ago said, oh the new regulation on fixed-line is going to be bad for Vodafone, now are recognizing that our position was no, as long as you have good equality of inputs and known price squeeze test. This is going to be good for us and I think its going to be good for us and for the incumbents also. So, it is absolutely the opposite. It is consistency of position, competition plus return on investment. Sorry, the second question was deterioration of the U.S. markets.

Robin Bienenstock – Sanford C. Bernstein

Yes.

Paolo Bertoluzzo

Yes, I – listen on that one, I have to say, for the time being I see structural conditions in the U.S. markets which are pretty good. There is more consolidation on smaller players. There is very healthy competition between different operating systems and the adoption of price plans which as you know are the kind of same concept of Red, so, family plans, multi-device plans and so on is progressing very well. Could it be that the new ownership of Sprint can create a more competitive Sprint player? Yes, it could. But again, this is not going to change structurally the market. It will make it a little bit more intense. But structurally, I see a pretty attractive market for a number of periods in front of us.

Operator

Our next question is from the line of Justin Funnell with Credit Suisse. Please go ahead with your question. Your line is now open.

Justin Funnell – Credit Suisse

Thank you. Yeah, a few questions please. The first one is Germany. Obviously, nobody really wanted an auction but now there is probably going to be an auction. I just wondered what you were thinking about the 1800 spectrum. Obviously, Deutsche Tel are building LTE to 1800 in the cities. It looks like they’ll be outgrowing you this quarter. Do you think it’s giving them an advantage and do you think that actually having some more 1800 at the right price would be interesting for you?

Secondly, investors are saying now that because things have gone quiet about further discussions in the US about a stake sale, that must be a sign that something is about to happen. Yeah, any comments on that?

Thirdly, India retains growth at 14% having slowed down. I’m just wondering if you could describe a bit the potential of that market. Is this a growth rate that we could –double digit could continue for a while? Could we see margins expand? Could this actually finally provide some good upside for investors? And then fourthly – sorry about the number of topics – tiering as well, the - obviously, tiering is starting to work really well in the US. LTE adoption is strong, usage growth is strong, it looks like you’re getting an early sign of the same thing. Are you seeing any signs of tiering starting to work better as well please?

Andy Halford

Yes, Justin, on tiering, I am not sure. We can really say that we have seen, assuming that what you call tiering is really the upgrade to higher data plans, right? This is your question on tiering, I guess?

Justin Funnell – Credit Suisse

Yes, that’s my question.

Andy Halford

Yes. No, I don’t think, we can have a definitive conclusion that there is a positive financial uptick. I think from a customer perspective, they like it. So there is more usage. But I cannot say that I see a tiering benefit yet. Let me turn Germany to Philipp and India to Nick Read.

On the U.S. to be honest, if there is noise, you think that something is going to happen. If there is no noise, you think that something is going to happen. The only thing I can tell you is if something happens, we will promptly inform you regardless whether it’s noisy or quiet. That’s the only thing I can say. Nick?

Nick Read

Yes, just on India, I just say yes, it was a very strong quarter. As Andy explains, our average base was up 3% quarter-over-quarter and we’re capturing more of the minutes on our primary SIM as the smaller players exit the market. So you’re effectively getting consolidation, has allowed us to harden the pricing. So pricing is up 6% quarter-over-quarter and of course we got the data revenue growth just under 50%.

So, I’ll tell you structurally when you look at India, it looks very favorable, of course there is always pockets of competitive actions, so you know we might have to defend that positions and circles and the other thing is of course just regulatory noise, we’ve had three regulatory small hits national roaming, SMS termination, VAS which might drag us about 1.5 percentage points of growth going forward from quarter two onward. So you know a little bit of downdraft there. And in terms of margins, we said we would once hit in scale go up to a 30% plus margin and I think we’re tracking well for improvements along that lines.

Vittorio Colao

Yeah, last on, but not least on Germany on LTE rollout, we don’t see any capacity issues. At this point in time, we’re focusing mainly on rolling out with 800s LTE and improving further coverage. We’re covering right now already more than 66% of population. So that’s our main focus to do that and to continue to promote 4G services.

As you know, we will have new auction for being effective in 2016, but it’s still at a discussion stage, the discussion is to re-auction the 900, 1800 and reserve part of it for the existing MNOs who are already spectrum holders. We are in intense discussion with the regulators to hopefully shape it in a way which is positive than far from an economic and capacity point of view.

Justin Funnell – Credit Suisse

Okay. Thank you.

Operator

Our next question is from the line of Nick Delfas at Morgan Stanley. Please go ahead with your question. Your line is open.

Nick Delfas – Morgan Stanley

Yeah, thanks very much. You can hear me okay. Just a quick one on the roaming issue again. Do we know which data network other operators will have access to, so would it be to your 4G newly invested network or would it be to a slower network?

And secondly, if the Commission persists in coming out with a low wholesale price without doing any cost methodology process or looking at whether you have significant market power, are there any effective legal avenues open to you to bring that to judicial review? Thanks.

Vittorio Colao

Yeah, Nick, I understand, as I said this is the hobby of these days. As I said in my earlier answer, I guess to Steven, this is still undefined. So I don’t have any detail and these are talks. So I don’t have any detail, I’m not even sure that people have felt for sure, I would expect that if governments want to sell spectrum and especially governments in large countries want to sell spectrum at high prices, they will make clear to the Commission that then the Commission cannot setup arbitrarily low wholesale rate on new technologies, because the next option will be in Germany or in any country with 50 million people or 60 will be a disaster.

So we probably will mitigate the more extreme ideas is also the fact that the member states might object to a reduction in value of the spectrum. I think commonsense would prevail. And legal, of course, I mean, of course, there will be eventually some judiciary actions that I’m sure some operators would consider or potentially some member states might consider against the decisions, which are not just the – our interventions and regulation, which is not justified by spectrum auction conditions and other stuff. But it’s early to think about those things. And as I said, I always like to think that our industry can find commercial solutions and not to regulate their legal solutions to issues.

Nick Delfas – Morgan Stanley

Thanks very much.

Operator

Our next question is from the line of Andrew Beale at Arete Research. Please go ahead with your question. Your line is open.

Andrew Beale – Arete Research Services LLP

Thanks. First of all, a quick clarification, data attach rates have declined sequentially in Northern Europe this quarter. Have you changed that measurement or is there something else that’s going on in the market that we should be thinking about?

And then I want to come back to an earlier question around network investments in Europe. I mean, smartphone data usage is still low in Europe, around a quarter of the US levels, and I guess that low usage makes you more vulnerable to MVNO-based competition if you can arbitrage banking on low average data usage. And I think it’s AT&T CEO that sees the merits in accelerating CapEx for 800 LTE in Europe and vastly improving the data experience and that would drive data traffic pretty hard. So what is it that’s wrong with Randall’s analysis of a missed opportunity for the European players here?

Vittorio Colao

Andrew, I would say, why don’t we pass the question to Philipp on Northern Europe attach rates, and I couldn’t hear very well unfortunately today there is a problem with some of you, not all of you, but some of you. I think you were asking again the question of can more investment in data trigger more data usage in Europe? This was the question.

Andrew Beale – Arete Research Services LLP

Yes. And it’s Randall of AT&T that sees merits in accelerating CapEx for 800 LTE and when you disclose what’s wrong with his analysis of a missed opportunity?

Vittorio Colao

I got it. I resist the temptation to give a flippant answer to the Randall AT&T thing, given the level of personal experience that they got last week in a remote area of the U.S. with the AT&T network. It seems to me that if you look at our statistics of usage on 3G and you compare to performance, you compare to the U.S. average data experience, Europe is much more advanced. So I’m not sure I understand where and what much more investment would create a benefit, given the fact that today, I regularly have in Rome, in London, in Dusseldorf, six, seven, eight, nine megabit per second on my iPad and on my smartphone.

Having said that, I’m not in the opposite camp, which is the camp of people who say, you shouldn’t invest, because in any case it doesn’t make any difference. So as I said, constant investment, continuous upgrade of our network, now half of our network is at 43 megabit per second, which is not the case of the U.S. networks of the old generation and getting to a target of 50% – 40% to 50% that’d be by 2015, I think is the right thing to do in Europe. Philipp, on the other question.

Philipp Humm

Yeah, on the data attach rates, there is no change in our commercial nor our accounting policy. So I think the key drivers probably the country mix is Turkey is gaining more momentum relative to the other, let’s say traditional Northern European countries in the overall customer base that will probably provoke some statistical impact. I think our IR team can give you more details thereafter to maybe verify that point. But I would think that should be the main driver behind it.

On the point early on smartphone penetration maybe just a few points, it’s – a lot of it is also an opportunity, which we are focusing on, which is why we drive Red, which is why we drive Red family, which is why we have launched in some markets Red prepaid, which is why we are looking at lowering with our own device line up the smartphone entry devices.

So that we can also offer them at attractive prices with prepaid customer, right. So it’s more of an opportunity for us going forward to be able to tap into that market as well. So it’s not only India which can basically grow smartphone penetration at low costs, but it’s also Europe that can do that.

Andrew Beale – Arete Research Services LLP

Sorry, can I come back to that data attach question first of all. I mean, the reported numbers are down in Germany, UK, Holland, and Turkey on an individual market basis. So it just seems to me maybe that some other change has happened there. And just coming back, Vittorio, to you on the sort of U.S. versus Europe experience, I mean, it seems to me that the biggest difference is the rollout of 3G in U.S. that’s sub 1 gigahertz which gets you a better average experience, wherever you are in buildings and so on. Whereas in Europe, 3G is at 2100 largely today and I know there’s a bit of 900 HSPA. And it’s that difference that means the man on the street’s experience is not as good, although I totally understand that where it works in Europe it works pretty well.

Vittorio Colao

Andrew, I’m sorry, I don’t recognize what you say. I think that the experience in Europe I mean again, at least I talk about the Vodafone experience, I don’t know about the others. On 3G with, as I said half of our network being at 43, and with all the optimization techniques that we used is pretty good, to be fair, it’s not as good as the Verizon 4G when they have introduced 4G in a massive way. But to be honest that from a customer perspective, you can watch videos, you can have an interrupted streaming in most of the places where you need to do that.

So I think we have a difference of opinion here and fine, we will keep debating, but I’m pretty convinced that we have a good experience in most and at least the customer report are not about bad experiences with data, so difference of opinions.

Andrew Beale – Arete Research Services LLP

Okay, thank you. And anything on the data attach rates or otherwise? Thank you.

Andy Halford

Back to you on that one must be statistic blimp.

Andrew Beale – Arete Research Services LLP

Thank you.

Operator

Our next question is from the line of David Wright at Deutsche Bank. Please go ahead with your question. Your line is now open.

David Wright – Deutsche Bank

Hi, good morning guys. Thanks for taking all these questions. Just very briefly, the buyback is completed. Should we assume there is no intention to launch an incremental buyback obviously with a little bit more pressure on the gearing?

And just following on to that, with the Kabel Deutschland deal completed, you’ve talked about the pro forma 2.4 times leverage. And I think, Andy, historically you’ve said that you’re okay with that level and the BBB rating. But I guess, if we do have cash flows down this year, if we have potential spectrum payments in India, whatever might happen with the Verizon dividends is not so clear, but maybe next year they could certainly be a little bit trimmed.

Do you feel comfortable at that level, or is there a sort of fairly accelerated need to bring that down? And also does that 2.4 level now pretty well mean that there’s not really M&A in terms of acquisitions on the cards? Thanks.

Andy Halford

Yeah, David, I mean a variety of questions I guess in that. So first of all buybacks, no current intention clearly happening, decided to make the investment in KDG with the gearing being higher than we will focus over time on reducing the level of debt rising on buybacks.

And secondly, the 2.4 times, I think is a comfortable level if you look at the collective of the cash generation from the controlled operations, the medium-term U.S. dividend flow et cetera, I think we are in a sensible space on that, and hence some very comfortable with that.

The balance sheet is not fully stretched at that level, but it is obviously a little bit more geared than where we are at the moment. So I look this in most angles and just say, I think we are in reasonable space even with the level of gearing a little bit higher and over a period of time, no doubt we will look to turn it a bit. But I think we’re in very comfortable position.

David Wright – Deutsche Bank

Okay, that’s pretty clear. Thanks very much.

Operator

Our next question is from the line of John Davies with Santander. Please go ahead with your question. Your line is now open.

John Davies – Santander

Thank you, good morning. I wonder if you could talk a little bit about the in-bundle revenues and specifically the typical contract length you have remaining and how that’s varied over time. So I’m wondering if you’ve managed to sort of extend the forward revenues you can expect over time as well as improving the proportion of revenues that are contracted. Thank you.

Vittorio Colao

Yeah, let me take that off. I mean, over a period of time if you go back over the last three or four years, I think we’ve moved from sort of 18-month contract as being the norm to 24 months is being much more the norm now, and clearly it takes a period of time for new customers to come on to new contracts. So the weighted average has risen during that period. I don’t have a specific number to mind, but the average contract duration has over the last three or four years risen slightly over time.

John Davies – Santander

Thanks.

Operator

The next question is from Mandeep Singh of Redburn Partners. Please go ahead with your question. Your line is now open.

Mandeep Singh – Redburn Partners

Thank you for taking the question. I’d like to ask Andy a question relating to just the general trend in Group service revenues. I recall at the last quarterly call, it was suggested that the minus 4.2 was hopefully the bottom and things would be improving. Clearly, there’s a 70 basis point improvement helped somewhat by working days. Are you still confident we’re at the bottom in terms of service revenue trends on a going forward basis? Thank you.

Andy Halford

Yes, I mean, the thing that is clearly weighing us down a moment is in part the MTR effect. As I said earlier to be in the high 2s is higher than our recent trend over the last two or three years. So realistically, we are going to see more down drop from that over the next couple of quarters as I said earlier on. Thereafter that does improve.

And I think as we have seen in the first quarter, there has been some ups, there has been some downs, Germany has been more challenging, India has done really, really well. So if I sort of step back and look at it overall, I’d say for the second quarter, I think we will be sort of in the same range as we’ve been in the first quarter. And then as we get to the back end of the year, the MTR effect starting to come off, that should pick things up a little bit.

Mandeep Singh – Redburn Partners

So just if I understand that, we’re going to be sort of at this sort of level and then getting better in the fourth quarter and into next year?

Andy Halford

Yes.

Mandeep Singh – Redburn Partners

Okay, thank you.

Operator

The final question for today is from the line of James Ratzer at New Street Research. Please go ahead with your question. Your line is now open.

James Ratzer – New Street Research

Yes, thank you very much. I had two questions please. The first one was just regarding your emerging market businesses. You’ve seen a very sharp acceleration in data volume growth this quarter and that’s also led to a good improvement in revenue growth. I was wondering if it’s possible to differentiate what you see as different in emerging markets that’s allowed that acceleration to happen whereas we’re struggling to see that happen in Europe.

And the second question was a broader question. I was wondering if I could get your thoughts in Europe on what you made of the potential for new competitors coming into the market using small cell technology, Wi-Fi, particularly thinking some of the cable operators, potentially British Telecom in the UK. How do you see that threat developing and is, how seriously do you think that could impact your business over the next few years? Thank you.

Andy Halford

Yes, thanks James, two broad questions. Let me take both of them at the very high level and maybe Nick can add something. First of all, what is happening in emerging markets is what we told would happen. It’s low voice prices and then data comes, and then there is no fixed infrastructure. So people spend a little bit more to use data applications, which are very useful because of the lack of fixed infrastructure, but this is not a replacement for voice, and therefore one is additive to the other.

In mature markets, instead high price voices, the same pickup of data is happening, but of course, this is happening at the moment where voice actually goes down in revenue terms, because it was priced more expensively. And so here there is kind of a line going down, a line going up, and the net factor is stable or marginally declining, which is why we have always been very optimistic on emerging markets, because we knew that when 3G comes actually the potential exploitment of the market is much higher, because there is no replacement effect.

On new competitors, small cell, Wi-Fi and so on, I would say that technologies are being mashed together. The whole industry is becoming much less religious on access technologies. We use ourselves Wi-Fi model, we will incorporate Wi-Fi into our new base stations. So new generation base stations will have Wi-Fi incorporated.

We are now today with an RFP or RFQ for small cells. So we will integrate all technologies, sometimes owning them, sometimes leasing them, and I suppose other players will do the same. And the competition will be basically for the data needs of the customers, not necessarily for the mobile only needs, so more competitors, yes, but also more ways to reduce our cost and to manage our CapEx efficiently.

James Ratzer – New Street Research

And once you finish building out 4G over the next few years, do you then see small cells as being the major driver of your CapEx kind of looking forward on a five-year view?

Andy Halford

No, I mean that’s not – in the scheme of things it’s not a big number. But we will develop depending on the topology and the density of usage. We will deploy all solutions and as always we will end up in different situations in large urban dense areas versus rural. And at the end of the day full spectrum frequencies and all technologies will be matched up to the lever whatever is the lowest cost solution for per gig or per meg or for whatever. So I think it’s going to be a mix.

James Ratzer – New Street Research

Thank you.

Operator

Okay. We have no more time for questions, and I’ll just pass the call back to you to close it.

Andy Halford

Yes. So first of all, thank you very much for all of your questions and apologies if I couldn’t hear some of them. Before concluding the call, I would like to recap the three key points. First, yes, there is some challenge in Europe, but emerging market businesses are according to strong growth in revenues, in customers, and in data.

Second, we continue to make progress in future proofing, our revenues through integrated price plans and Vodafone Red is central in that. And finally, again in another, I think this is the third time in a row, our unified communications strategy is progressing and each quarter we are adding another piece of the puzzle. This time we had positive developments in Germany, Italy, and Spain.

So thank you very much for participating in today’s call, and I look forward to meeting you in person.

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