Vodafone Group Public Limited Management Discusses Q3 2014 Results - Interim Management Statement Call Transcript

Feb. 6.14 | About: Vodafone Group (VOD)

Vodafone Group Public Limited (NASDAQ:VOD)

Q3 2014 Interim Management Statement Call

February 06, 2014 4:30 am ET

Executives

Vittorio A. Colao - Group Chief Executive Officer, Executive Director and Chairman of Executive Committee

Andrew N. Halford - Chief Financial Officer and Executive Director

Philipp Humm - Regional Chief Executive Officer for Europe

Stephen Charles Pusey - Chief Technology Officer and Executive Director

Nicholas Jonathan Read - Group Chief Financial Officer-Designate

Analysts

Nick Delfas - Redburn Partners LLP, Research Division

James Britton - Nomura Securities Co. Ltd., Research Division

Akhil Dattani - JP Morgan Chase & Co, Research Division

Nick Lyall - UBS Investment Bank, Research Division

Paul Marsch - Berenberg, Research Division

Timothy Boddy - Goldman Sachs Group Inc., Research Division

Simon Weeden - Citigroup Inc, Research Division

Justin Funnell - Crédit Suisse AG, Research Division

Jeremy A. Dellis - Jefferies LLC, Research Division

Robert Grindle - Espirito Santo Investment Bank, Research Division

David-A Wright - Deutsche Bank AG, Research Division

Andrew Beale - Arete Research Services LLP

James Ratzer - New Street Research LLP

Stephen Howard - HSBC, Research Division

Ottavio Adorisio - Societe Generale Cross Asset Research

Mandeep Singh - Redburn Partners LLP, Research Division

Operator

Hello, good morning, ladies and gentlemen, and welcome to the Vodafone Group Third Quarter IMS Analyst and Investor Conference Call. Today's call is hosted by Vittorio Colao, CEO of Vodafone Group. Please go ahead, sir.

Vittorio A. Colao

Thank you, operator. Good morning, and welcome to our Interim Management Statement for the Third Quarter. I will briefly take you through the highlights of the quarter before handing over to Andy, who will update you on our financial performance. I will then close with an update on our strategic and commercial developments and then move to Q&A for what -- for which Andy and I will be joined by Philipp, Steve and Nick.

So let me start on Slide 3, highlights for the quarter. Group organic service revenue was minus 4.8%, consistent with Q2, with Europe remaining challenging, particularly in Germany, down 7.9%, and Italy, down 16.6%. We continued to see strong growth in our emerging markets given the strong data usage, with India at plus 13.2%; Turkey, plus 3.9%; and Vodacom, plus 3.5%. We are beginning to see signs of stronger commercial performance in Europe through better contract net additions, and this is driven by both our Red and our 4G strategies. We are also seeing success with our convergence proposition with improving fixed line trends and a growing customer base.

We confirm today our full year pro forma guidance of around GBP 5 billion of -- for adjusted operating profit and between GBP 4.5 billion and GBP 5 billion for free cash flow.

Vodafone Red has now launched in 18 countries, and we have 9.8 million customers. We are well on track to reach our target of 11 million to 12 million customers by March. Red is today stimulating data and voice usage, and ARPU dilution is showing signs of stabilization. We continue to grow our 4G coverage. Now we are in 13 countries across both Europe and AMAP with 2 million customers. I will show you later the improvements in the data monetization and usage in our 4G markets, which is on average double that of those using 3G plans.

Our enterprise business has begun to demonstrate a better commercial performance as well, with improvements in churn and positive net profitability in most of our Europe markets. In key growth areas, progress has been particularly good, with machine-to-machine revenue growth of 30% and VGE up 4.5%.

We updated you on the Project Spring program in detail in November. For now, we are entering final negotiation with our network vendors and our markets are preparing their teams to deliver the business plans, so markets are actually already accelerating their network buildout. We have made further progress in our unified communications strategy across Europe, and we have completed the acquisition of Kabel Deutschland in the quarter where we are now a 76.6% shareholder. At the AGM on the 13th of February, we will table the domination agreement for approval. And lastly, we held the AGM for the Verizon transaction last week, where all the resolutions were passed, and we are on track to complete the transaction on the 21st of February.

Andy, over to you for the numbers.

Andrew N. Halford

Good morning, everybody, and thank you, Vittorio.

So I'll start on Slide 4 by giving you an overview of the group performance. As Vittorio has mentioned, group service revenue in the quarter was GBP 9.9 billion, which was down 4.8% year-on-year. In Europe, service revenue declined by 9.6%, the same as the previous quarter, reflecting continued economic pressures and the increased competition in some of our main markets. AMAP, which now includes Turkey, continued to grow strongly at 5.5%, with good growth in customer numbers, accelerated data usage and more supportive pricing environments, particularly in India. I'll go into more detail on each of these regions shortly.

On a management view, CapEx was GBP 1.8 billion in the quarter or GBP 4.5 billion year-to-date, which is around GBP 500 million ahead of last year's CapEx spend due to accelerated 3G sites in India and enhancement to Germany's network capability. We continue to expect the full year capital investment to be similar to last year, plus approximately GBP 500 million of initial Project Spring spend.

Free cash flow was GBP 1 billion in the quarter and GBP 3.1 billion year-to-date. This is GBP 300 million lower than last year due to the phasing of the CapEx spend.

Net debt at the end of the quarter was GBP 31.5 billion, which will be significantly reduced once the Verizon transaction completes at the end of this month.

On Slide 5, we have our usual service revenue walk. You can see the impact of adverse foreign exchange movements on the left driven primarily by weakening Indian rupee and South African rand, which is partly mitigated by favorable euro movements. The M&A movements in the quarter are mainly due to the KDG acquisition. Strong adoption of our integrated plans, particularly Vodafone Red, has driven up mobile in-bundle revenue, which now represents 59% of Europe mobile service revenue, up 7 percentage points year-on-year. This has been particularly evident in Germany, Italy and Spain, as Vittorio will explain later.

Mobile out-of-bundle customer revenue declined 11.8%, which is consistent with the prior quarters, reflecting increased take-up of integrated offers and the ongoing economic and competitive pressures in European markets. There was an MTR impact of 2.4 percentage points this quarter, and we're expecting this to reduce roughly 1 percentage point next quarter. Other service revenue is declining partly due to revenues from our MVNO agreements, where we are being increasingly strict on the conditions to ensure our differentiation is protected.

Turning to Slide 6. As Vittorio mentioned earlier, we have seen an improvement in our contract net additions over the last few quarters, driven by our successful 4G and Red propositions and additional investment in selected markets. Our commercial strategy is improving churn, growing our customer contract base and improving our customer mix, which has turned a quarterly reduction of 135,000 European contract customers into an increase of 432,000 over the last 4 quarters.

Turning to the next slide, let's look in more detail at each of our key countries.

Firstly, Germany. Service revenue declined 7.9%, or 6.2%, excluding MTRs. This represents a deterioration on the prior quarter, reflecting increased price competition both in the consumer contract and enterprise segments, creating downward pressure on ARPU. We have increased network investment this quarter and upgraded 1,040 sites to high-capacity backhaul, which will support our LTE rollout, which is now at 67% population coverage.

We have seen some commercial improvements in the quarter following an increase in acquisition and retention spend, which is reflected in our strong net additions of 292,000, of which 123,000 are contract. Smartphone penetration continued to grow, up 11 percentage points year-on-year to 62%. And mobile in-bundle revenues increased 6%, with strong demand for our Vodafone Red plans. Following our acquisition of KDG, they reported a strong quarter with broadband net additions of 88,000.

Turning to Italy. The service revenue declined. Excluding MTRs, it was flat quarter-on-quarter at 12.4%, with further deterioration in the underlying performance as the aggressive summer pricing filtered through the prepaid base. There are, however, some signs of prices recovering to the EUR 15 level, up from EUR 10 in the summer, but the overall market continues to contract. Despite these challenges, we continued to roll out 4G, now in 27 cities. We are seeing positive signs of increased data usage with our 4G plans, with data users up 13% to 9.8 million or 12.8 million data users on a 100% ownership basis. We now have 1.4 million customers on Vodafone Red plans, representing 97% of consumer contract gross additions and are driving growth of in-bundle mobile service revenue, which was up 10.6% year-on-year.

Our convergence strategy in Italy supported the fixed line revenue growth of 1.8%, which has turned positive, up 9.9 percentage points year-on-year. We've also had some favorable news from the regulator who has determined fixed line wholesale fees and cabinets access, which support our fixed line investment strategy.

Moving to Slide 8, where we look at the U.K. and Spain. In the U.K., service revenue trends declined by 5.1%, or 3.3% excluding MTRs. We continue to accelerate our 4G rollout, which covers 13 cities, and a further 4 cities will be covered in Q4. We have experienced the strong take-up of our 4G services with our special content offer and now have almost 0.5 million customers at a premium ARPU. We have 2.3 million customers on Vodafone Red plans, which represent 36% of the consumer contract base. The data usage from 4G Red customers is supported by our Spotify and Sky Sports offers and an increase in contract smartphone penetration, which is now 77%, up 4 percentage points.

Cable & Wireless continues to deliver the targeted synergies. So far, we have connected over 2,700 base stations to our network.

In Spain, service revenue declined by 10%, excluding MTRs, which is an improvement quarter-on-quarter, driven by a stabilizing contract base and strong fixed line revenue growth. However, the market remains challenging, with ARPU declines driven particularly by continued competition with MVNO convergent offers.

We continue to lead the market in 4G, which is now available in 19 cities, with a target of 80 by the year end. We expect to launch our first fiber offer in April following our current trials. Vodafone Red is performing well with 1 million customers, of which 30% have taken a fixed line offer. This, in turn, has boosted fixed line service revenue, which is up 5.7% in the quarter.

Moving to AMAP on Slide 9. In India, we continued to gain market share, with 4.9 million net additions in the quarter. We now have 160 million customers, representing 38% of our total group customer base. We continued to see less price discounting, which has helped to increase ARPU by 9.6%. Vittorio will show you later how data is really taking off in India and in our AMAP region, with data browsing continuing to grow, particularly strongly India, now representing 10% of service revenue.

Data users have grown by 38% year-on-year to 46 million. And we now have over 5 million 3G customers using, on average, 730 megabytes per month, which is well above the European average. Given the take-up of 3G usage, we have accelerated the rollout of 3G sites in the quarter.

The auction for 1,800 and 9,000 megahertz spectrum started at the beginning of the week and has yet to conclude. Therefore, we cannot comment on our position at this time.

Moving to the bottom of the slide. Vodacom Group service revenue grew by 3.5%, supported by quarter-on-quarter growth from South Africa, up 0.6%. This was driven by successful summer promotions, which led to strong net additions of 1.3 million, and traffic uplift, which boosted ARPU growth of 3.8%. ICASA, the South African regulator, announced proposed MTR cuts last week that will be effective from 1st of March this year. Vodacom is supportive of an MTI -- MTR glide path that does intend to challenge the legal validity of the process.

In Vodacom International businesses, service revenue grew by 15.1%, slightly lower than last quarter due to increasing macro and competitive pressures and were supported by strong prepaid customer net adds of 1.3 million.

Now on to Slide 10 for the group's financial position.

We generated GBP 1 billion of free cash flow during the quarter. Our overall net debt increased to GBP 31.5 billion mainly due to the GBP 7 billion acquisition of the 76.6% stake in KDG. On a statutory basis, with deconsolidated debt raised locally by joint ventures, principally in Australia, net debt was GBP 29.8 billion. As you know, this debt level will be significantly reduced once the Verizon transaction completes. The chart on the right shows the pro forma net debt post closure but before the acquisition of the remaining KDG minority. This will be our lowest level of net debt since March 2005.

And to conclude, on the next page. We have a less than 3 weeks to go before the completion of the U.S. transaction, which we expect to occur on the 21st of February. We held our AGM last week, where all resolutions were carried for both the general and court meetings. The consolidation of Vodafone shares will take place on Monday, the 24th of February, and the commencement of new ordinary and ADRs will be traded from that date.

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

Vittorio A. Colao

Thanks, Andy.

I'll now focus on our commercial and strategic priorities. Starting from Slide 12, you can see how we are continuing our transition to become a scale data company. Top left chart. Data traffic growth is rapid, is up 64% year-on-year, driven by smartphones and 4G. 4G now makes 17% of European data traffic. We have seen strong growth in traffic in AMAP as well, up 10 percentage point to 40% of total group data traffic. On the top right, you can see the improving user experience of our customers. 85% of the data sessions on all smartphones now reach over 1 megabyte per -- 1 megabit per second. This highlights the progress we have made in upgrading our network capability to support faster speeds for customers. And of course, it's not just about faster speed, it's also about our network footprint. As you can see, and here I'm on the bottom left, we continued to expand our 3G and 4G network coverage, up 22% year-on-year. We have now around 14,000 4G sites across Europe, and 60% of our 3G footprint is at 43.2 megabit per second speed.

As Andy mentioned earlier, India data usage continues to accelerate. And to stay ahead of the demand, we have rolled out our 3G sites more rapidly. As you can see on the bottom right, India 3G's traffic now makes up 16% of the AMAP total, and India is already the second biggest data market in the world.

Moving to Slide 13. I will share with you here some of the very encouraging signs we are seeing with 4G. We have 2 million customers with a 4G device and plan. And in the last quarter, 45%, 45% of our smartphone and tablets gross adds were 4G-enabled device, and this is a number which is also surprising us -- even us a little bit.

Top left. Transition to 4G in the U.K. is also driving a significant increase in data usage, with an increase of over 130%. And in Italy, data usage has tripled for customers taking a 4G device and plan together. On content, our U.K. performance has been boosted by a differentiated 4G offering for our customers which includes an option to take a content package or to choose between 2 content packages. As you can see from the chart in the top right, those customers who use the content are using 2x to 3x more data than the ones on a standard 4G plan. 50% of our 4G customers have activated their content offer and 33% are shifting usage back from WiFi to 4G, again a proof of the good performance of our 4G.

Moving to the bottom left. You can see that while usage of video and music streaming is increasing, the really good experience of 4G is driving also a much greater data usage of even more basic applications like search or email.

And finally, bottom right. As you might expect, we are achieving a very good ARPU on 4G customers compared to the average of our contract base. In particular, a direct comparison for the U.K. shows an ARPU uplift of 19% from a Red 3G to a Red 4G customer, which of course is very encouraging for us.

Now let's take a broader look at the progress on Vodafone Red on Slide 14. We have 9.8 million customers across 18 markets, and we are well on track to reach our 18 to 12 million target by March. If you take our 4 largest European markets, Red now accounts for around 23% of customer -- contract customers and 34% of the revenue.

ARPU management, of course, is a key element of Vodafone Red, and we continued to see an improving trend in ARPU dilution, as illustrated in the top right-hand chart, in the U.K. and in Spain. And there are also signs of churn improvement and signs of NPS scores continuing to get better. So we will continue to work on developing the plans, with increasing focus on family plans and shared data going forward.

Moving to the bottom left. The growth in our Red plans is driving the group towards in-bundle revenue, away from what I would call the unprotected out-of-bundle or at-risk out-of-bundle revenues. 59% of our European mobile service revenue now comes from bundles, whether it's contract or prepay, up 7 percentage points year-on-year. And again, this is very important to future-proof our revenue vis-à-vis the technological change.

And Red continues to simulate customer usage, both voice and data. Typical data usage doubles on the migration to Red, and voice also is up 20%. We are also very focused on the roaming opportunity. Again, here, data roaming usage is up 137% year-on-year. And our daily roaming offer is now being used by nearly 11 million customers.

Moving to unified communications, Slide 15. You are familiar with this kind of 3-steps approach to unified communication. Here, we have highlighted our Q3 progress with the red circles and the red words on the table.

In Italy, we have reached now 37 cities with our VDSL offer, and we are in negotiations with vendors to fulfill the self-build to the cabinet. We continue to accelerate our self-build fiber deployment in Portugal, which now has over 700,000 homes passed. In Spain, we will commercially launch our fiber product in April, and we are targeting 3 million homes passed by September 15. And as Andy mentioned, we are seeing improvement trends in fixed line revenue, driven by growing net additions. Also, our German bases continue to decline. The rate of decline is slowing also in Germany and the launch of our new wholesale VDSL proposition in February should be a further positive catalyst.

So conclusions on Slide 16.

Growth in emerging markets continues to be strong. Demand for data is really taking off across the group. This is a positive secular trend that partially offsets the ongoing regulatory competitive and macro pressures in Europe. As I mentioned at the half year, I do feel that we are approaching a turning point in Europe, and I'm encouraged to see the early signs of increasing commercial traction in several of our markets, as Andy has shown before.

Financially, we are well positioned. We will have a very strong balance sheet when the Verizon Wireless transaction completes later this month, and significantly improved dividend cover post the share consolidation. And today, we have confirmed our full year pro forma guidance.

In terms of strategic process, we have continued to develop Vodafone Red and our 4G offer with almost 10 million and 2 million customers, respectively, on these plans today and growing continuously. We are delivering on our convergence strategy building our capability market by market, with the aim of being a unified communication leader, a scale data company, as I call it, in all of our major markets.

And finally, our enterprise business is developing clear differentiation through a suite of products and services, which will move us further up the value chain of -- from prior connectivity. The strong growth in machine-to-machine, the strong growth in VGE demonstrate that this strategy is beginning to bear fruit. Our goal now is to push forward aggressively with Vodafone 2015, accelerated and enhanced through Project Spring so that we have a solid base from which to spring forward.

Before opening to Q&A, I would like to take this opportunity to say a few words on Andy Halford, who is sitting next to me. Today, it's the last announcement led by Andy as CFO, as he retires from Vodafone in April. Andy has been a great CFO for this company, first in operational roles and then clearly with a group leadership role. I believe that we all have appreciated throughout the years Andy's professionalism, his very sharp and quick intelligence and a really extreme clarity of thoughts and expression. And personally, Andy, I have really appreciate through the years your judgment, your calm approach to problems and your advice to me on strategic matters. So I would like to take today's opportunity to thank you in front of this audience, which for us and for the company, Andy, is very important. And of course, having said all of these, I will pass to you as many questions as possible.

Andrew N. Halford

Thank you. Nothing changes there, then. Thank you...

Vittorio A. Colao

Back to you, operator, for questions. We are joined by Philipp, Nick and Steve for the questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Nick Delfas of Redburn.

Nick Delfas - Redburn Partners LLP, Research Division

Best wishes, Andy, for the future. It's been great working with you over these years. It's a question, though, about fixed line. In Italy, specifically, you said that you've been given a good price for the sub-loop and access to cabinets, but realistically, how long will it take to actually build lines given the need for municipal approvals? And are you philosophically opposed to doing a kind of German-style contingent-model deal with TI as an alternative?

Vittorio A. Colao

Yes, Nick, first of all, I didn't say that we have been given a good price. You said it. I think the price is outrageous and actually too high, and we'll always try to get a lower price. I said that we are enabled to reach 37 cities and that we will now work hard to connect the cabinets with our own fiber. I -- we are open to all possible agreements, as I indicated in my chart and discussed many times with you. We see, quite frankly, different approaches to fixed line in different markets, depending on the presence or not presence of a cable company and depending, quite frankly, on the strategy of the incumbent.

Nick Delfas - Redburn Partners LLP, Research Division

So if I could just follow up. I mean how many homes connectable do you think you might have in Italy or Spain by March 2015?

Vittorio A. Colao

Spain, we will reach, 3 plus 3, 6 -- sorry, 3 by September 15. And then there's an agreement with FTE to go to up to 6. Philipp, for Italy, 6-about, above 6?

Philipp Humm

About 3, 3 in Italy.

Vittorio A. Colao

3 in Italy as well.

Nick Delfas - Redburn Partners LLP, Research Division

And that will be quite back-end loaded, though, in terms of the rollout.

Philipp Humm

I mean we can -- it's -- Nick, it's Philipp here. I mean we can reach the households pretty early based on the rollout of TIM. And what we are obviously doing is we're building our own FTTC reach to the households on top, which is a fast, big cost-saving and quality improvement.

Operator

Our next question is from the line of James Britton of Nomura.

James Britton - Nomura Securities Co. Ltd., Research Division

2 questions, please. Firstly, is commercial partnership your preferred solution to position yourselves for convergence in the U.K.? Perhaps you can just sort of flesh out the options that you've got in the U.K. And secondly, on the enterprise trends. You sort of referenced a little bit more, I think, some pressures at enterprise. Can you just clarify whether the enterprise trend does deviate significantly from the headline trend for your European markets? And perhaps can you just highlight what might bring a bit more rational pricing back into this segment of the market?

Vittorio A. Colao

Yes. Let me take the first question on the U.K. And maybe, Philipp, you answer on enterprise in Europe. You used the word preferred solution. We don't have a preferred-solution mindset. We have an economical and operational best working solution. And quite frankly, a commercial partnership, the success of a commercial partnership depends on the economic conditions that you can establish with the partner, whether the partner is an incumbent or somebody else, like it could be Metroweb in Italy or -- clearly, it doesn't really make any difference, first. And second, how genuine and genuinely good are the operating conditions attached to a commercial partnership in terms of access, maintenance interventions, intervention times and all the ability to manage our own services, quality of bandwidth and so on. All these things have to be part of a package. And in the end, there is a -- if there is an alternative which is an M&A alternative, of course, we will consider also the M&A alternative. So we are not in the preferred alternative. We kind of look at all the alternatives market by market. And as you have seen, we can end up with a cable company. We can end up with a fiber build of our own. Or we can up -- we can end up with a contingent deal, like in Germany.

James Britton - Nomura Securities Co. Ltd., Research Division

And just as a follow up on that point. Would you rule out organic fiber in the U.K.?

Vittorio A. Colao

I -- alone, probably I would. But again, when you talk U.K., it depends what you're talking about, which areas of the U.K., which parts, which vertical builds versus horizontal. U.K. is expensive. And it's mostly horizontal, therefore, it's horizontal housing development. And so it's more expensive than, say, Madrid or Lisbon or Porto. I mean it is more expensive. So I wouldn't rule it out, but I would say the business case is more difficult. And enterprise?

Philipp Humm

Yes. James, let me just address the second question, on enterprise. You asked for the development of enterprise in Europe relative to Europe overall. So enterprise is a little bit better in service revenue than Europe overall, the number is 1.2% better. Going forward, we expect enterprise -- and the key driver really was ARPU decline due to a company simply, with the economy, buying at a significantly lower rate. We expect recovery as the economies are recovering. And as you know, most of our European economies are in positive GDP in next year. And we expect also recovery as we continue to be successful in winning market share on the fixed line side in the countries where we have fixed offerings.

James Britton - Nomura Securities Co. Ltd., Research Division

I think you called out Germany and the U.K. as the real markets where there was enterprise pricing pressure. Can you just perhaps give us the enterprise numbers for those markets?

Philipp Humm

Okay. So if you want on Germany, overall, in service revenues in enterprise, we are at minus 5. And in the U.K., we are at minus 7.8.

Operator

Our next question is from the line of Akhil Dattani of JPMorgan.

Akhil Dattani - JP Morgan Chase & Co, Research Division

It's Akhil from JPMorgan. Firstly, just a follow-up, Vittorio, on your comments earlier about the grounds for more optimism in Europe. I just wonder if you can maybe flesh out particularly what you feel more optimistic about. Andy mentioned the easing MTR drag. Is that the predominant factor here, or are there also operational and macro factors? And when we think about that, do you start to feel confident that we see sequential improvements going forward near term? Or is that really more about the medium-term message that you're focused on? And then secondly, if I can just ask a question on MVNOs. It seems, over the last couple of months, that you've taken quite a few major decisions with regards to MVNOs in Europe and parted a company with some fairly meaningful MVNO players in some of your markets. So I just wondered if you could just update us on just how you think about the roles they play and just how your strategies might be differing market by market, particularly noting that, that doesn't seem to be the case in terms of what you're doing in Germany?

Vittorio A. Colao

Yes. Let me start from the second because it's an easier and quicker answer. We are determined not to stop working with MVNOs but to work with MVNOs who are willing to recognize the value and the cost of a spectrum and particularly 4G and who are truly complementary to our offer. In other words, there's no point in paying spectrum, whatever, GBP 1 billion per market or whatever is the number, depending on the size of the market, and then saying, "Well, that's some cost. Now I'm going to give it to somebody else for free and they're going to undermine my own offer." I -- it's something, I think, not very smart that our industry has done and, to some extent, continues to do. That backfires. Second, when you are investing massively on network quality, and as I said, early 4G evidence is very positive, again you can share it with a partner or a, yes, a partner if the partner is willing to share some of the cost. Otherwise, why would I do it? Why would I invest in Spring? Why would I have the biggest capital spending plan ever to then give it away to somebody else not bearing the same cost? So it's not a strategic kind of shift away, which justifies why, in some case in some markets, we might still stay with MVNOs. But it has to be a true partnership, not a way to give away capacity at marginal -- at a very marginal and not fully costed level. On the grounds for optimism, I would say I'm always kind of looking at operational stuff first. So yes, there is an MTR ease-off coming. There is also an MTR probably worse situation coming in South Africa. But I would say that our grounds for optimism, as Andy has said, the contracts performance is good. So Red and Red 4G are getting more traction in a number of markets. We are investing more in some markets we under-invested. Maybe in Germany was one of the cases. I am really convinced that 4G data and high-speed 3G is becoming a very good experience. The role of content here is very important. We see customers starting to go around 2 gig per month. Some of them are 3, some of them 4, music. So I cannot say that we are where America or Korea are, but there are good signs that once we get spectrum -- for ages, we've said, give us the spectrum, give us the time to invest and usage will go up. And then of course, fixed line and convergence also. Again, some people like to portray this as a threat to Vodafone. The way I see it is we have -- we used to have a 30% market share in mobile. Now we have only 16% in total comps or 17% in total comps. So it's an opportunity in enterprise, in large enterprise, in some of our markets. Italy, Spain is turning into an opportunity. So those are the reason, the underlying reason we - which leads me to say we see signs of -- that can lead us to be optimistic. Of course, there will continue to be headwinds and the impact on new pricing on the customer base and all these things. But that's my kind of more business-oriented thing. Now let me turn to Andy. Andy, do you want to add something from a kind of more financial?

Andrew N. Halford

No. I think it is small individual parts. MTR is a part of it. The contract net adds growth picking up is, I think, a good lead indicator which, over time, cumulatively does build. 4G customers, sort of 2 million but building nicely, and with the ARPUs being higher and Red continuing to take off and fixed revenues now going positive. I think each of them, just they're small individually, MTR is maybe somewhat bigger, but I think they are all just directionally heading in the right sort of space.

Operator

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

Nick Lyall - UBS Investment Bank, Research Division

It's Nick at UBS. Can I ask 2, please? Firstly, on the slides, Vittorio, it seems as if you're a bit more positive on linking with content providers. Could you just update us maybe on your views on owning content, please? And secondly, on the U.K., a little bit like James's question, please, but it's still, standard to mile [ph], that there's no U.K. consumer fixed offer from Vodafone, no broadband offer, which seems to just leave the door open for the BT with its quad play offer later in the year. Could you just update us on why no fixed offer yet in the U.K., and when and what would push you to do that do you think?

Vittorio A. Colao

Yes. The first answer is easy and the second also is short, it's going to be short. The easy answer is I don't think you need to own content. I think you need to facilitate and to make content easily testable by customers. And once they test it and they like it, they will find -- and there's plentiful of content which is already available in various ways. The issue is just to distribute it in a better and easier way. And again, we are seeing a nice pickup of that. On U.K., as I said, we are looking at different options. Today, there is not a huge or a super strong converged market. It could be different in 6 or 12 month in the U.K. and our position could be different in 6 or 12 month, but we are still looking at different ways of doing it.

Operator

Our next question is from the line of Paul Marsch of Berenberg.

Paul Marsch - Berenberg, Research Division

I have a couple of questions as well. I just wondered if, given what's been going on with MVNOs in various markets, you could perhaps quantify for us what you think the drag from losing MVNO contracts in the U.K. and Italy might be over the next few quarters as they start to come into the equation. And then in the U.K., do you see BT, with its 2,600 megahertz femtocell strategy or potential strategy, which everybody seems to think they're going to announce, as a threat?

Vittorio A. Colao

Well I see BT as a possible new competitor. They have already been here. They have already tried some mobile MVNO strategy. They will probably strengthen it with WiFi and 2,600. But at the end of the day, yes, I see it as another factor of the strategic landscape in the U.K. Calling it a threat? We will see. It depends on what others will do, and the whole industry will evolve. So I'm -- let's say we recognize that there could be or there will be a new factor in the U.K. landscape. Philipp, do you want to take the first one?

Philipp Humm

On the -- yes. On the MVNOs, overall, if you look for Europe on the quarter, MVNOs account for about 150 million for us and have been declining a bit more than the average service revenue decline we had in the region and which was mainly due to 1 or 2 MVNOs which we did not continue, particularly in the Netherlands and in Spain.

Paul Marsch - Berenberg, Research Division

I mean are you able to say anything about the potential impact that losing BT and PosteMobile in Italy may have, I don't know, over the next year? Is that 1 percentage point of drag, or 0.5 percentage point of drag, or...

Philipp Humm

Yes, no, it's a very -- I mean we all have very strong bases with the MVNOs, so whatever deal we discontinue, but we also started some other deals, will have a very gradual impact on the negative and on the positive side, right? So there will be a little bit of drag there, but we can't quantify it at this point.

Operator

Our next question is from the line of Tim Boddy at Goldman Sachs.

Timothy Boddy - Goldman Sachs Group Inc., Research Division

I'd like to come back to this question of the underlying x MTR trend. Obviously, there's the around 1 point benefit to come in the fourth quarter, but I guess, pressing the same line as Akhil, are you optimistic that there's an underlying improvement coming through in the near term? Or is that more a longer-term comment? I guess that leads to thinking about your commentary on ARPU dilution starting to flatten out, as you showed on the slides. It would be really helpful if you have any data on a kind of like-for-like basis of the customer who was 3G going to 4G because obviously there's a risk of -- that 4G users are all the highest spenders, anyway. Just to give people increased confidence that we are indeed -- having effectively repriced the base to deal with the technology risks and some of the competitive factors, we are indeed finding the floor.

Andrew N. Halford

Yes, Tim, I mean, honestly, the answer is pretty similar to the answer to Akhil earlier on. The MTRs, clearly, as I said, there's a sort of percentage point of gain that will come through from there but which will be helpful. The rest, we've said, are just gently starting to point in the right direction. I think its time line is difficult to predict with huge accuracy, but I do think, particularly the customer growth coming through, the evidence is that the customer growth and then the pull-through of the revenues. So it happens in that order. So it's something which will happen progressively over a period of time. On the ARPU dilution, we've included some stats in here on 4G and 3G. And as we get more body of evidence on 4G, no doubt we will share that with you as we go forward so that you've got more like-for-like comparisons.

Timothy Boddy - Goldman Sachs Group Inc., Research Division

And then just a quick follow-up, if I may. Can you just maybe help us think through more explicitly the pros and cons of your strategy in Spain in terms of building versus acquiring?

Vittorio A. Colao

Well, everything -- I'm not sure, I mean, I can explain to you the pros or cons other than we have a model, there is a cost for acquiring assets. And there is a time value of acquiring assets and there is a cost for building and there is a much longer time than for deploying and activating commercially. And at the end of the day, there is a breakeven point at which you say, "Well, this one, I would prefer, but at this price, it's too expensive. And the other one is a lot of hard work, but at these conditions, it is cheaper." And as I said, the real difference that we are finding in when you talk about fixed and broadband versus mobile is that while mobile has economics and models, which are pretty similar across countries, apart from the cost of labor, if you want, and a little bit the geography, fixed is dramatically different. I mean cities could cost completely different levels in because of the way they are built, whether you access the sewage or not, whether somebody has right of ways in old infrastructure or not. And so it is, at the end of the day, a model, and you have to assess one and the other.

Operator

Our next question is from the line of Simon Weeden at Citigroup.

Simon Weeden - Citigroup Inc, Research Division

I do have a couple. One is coming back to one of the earlier questions. I just wondered if you could -- you made some comments about the impact of MVNO losses, on the drag on the gross rate this quarter. I wonder as well if there is an impact near term, a fairly near-term impact from the migration to the Red tariffs as well. And if you could quantify that in terms of the impact this quarter versus last quarter. Do you have a sense as how big that is and sort of where capital sales perhaps -- when that might fade out? And then the other question was around M&A. I mean there's been a fair amount of speculation. Your name obviously often comes up just partly because of your size and partly because of your financing position. I wondered if you have any comments on kind of the talks about interest in Spain, Italy, and whether there might be some assets that could be sold and whether it would be fair to characterize assets getting stronger where you're strong or digging deeper where you're deep, or something along those lines.

Vittorio A. Colao

Simon, on the first question, I don't think I would go into commenting on the impact of migration because then you'll get into an amazingly complicated market-by-market segment, enterprise-versus-consumer type of thing. So it is detailed, and to be honest, it is -- I'm not even sure I could do it in a short answer. Let me, however, pick the side of the MVNO part. The -- yes, there is. When an MVNO disconnects, there is a loss of revenue, but you have also to factor in a couple of things. First, some customers eventually decide to stay with the operator because of the quality, and the coverage and that kind of thing. Now given the rates that MVNOs typically give us, you only need whatever. In theory, you would need only 30% of the customers staying with you to be breakeven. Now they don't stay 30% with you to give you breakeven, but that gives you an idea of why Philipp was saying the impact is to be smoother. Second, you have a much better capability of managing your own brand and your own services because then it's an advantage that goes for the Vodafone customers. So that's why I was saying if MVNOs are willing to recognize the value of it, good. Otherwise, fine. I mean it means that there's a different type of positioning that they want to take in the market. On M&A, you wouldn't expect me to make specific comments on countries or things. As you would expect, as we've said many times, we want to become deeper. We want to become a scale data company, i.e. a company that brings data at a cost-efficient level through a variety of screens and pipes. And therefore, you would not be surprised to hear that, from time to time, we look at opportunities in the countries which are important to us. And it's not surprising that the rumors that you have seen on the newspapers tend to be on the important countries for us and not on the less-priority ones, but I wouldn't comment on specific situations.

Simon Weeden - Citigroup Inc, Research Division

Would you say you're done with sales disposals?

Vittorio A. Colao

How can I say that? If somebody comes tomorrow with a good offer for a non-priority market or for a -- or a better value-delivering offer for a market where we have a different perception of the value, how could I say that we are done?

Operator

Our next question is from the line of Justin Funnell at Credit Suisse.

Justin Funnell - Crédit Suisse AG, Research Division

Just firstly on the Italian markets. How quickly do you think that will turn around? Obviously, there's been some pretty dramatic moves on the marginal price points going into Q1 as well, but is it going to take a while for it to come through in the numbers? Or would you hope for an improvement quite quickly? Secondly, on the whole experience of buying a cable operator in Germany, are you getting any sort of lessons learned from that at all? Is it making you more positive about the potential for integrating mobile and cable assets as you start to work through that whole projects? Thirdly, Brussels. Do you think this roaming market home thing is going to happen? Or do you think the newly produced package is so delayed now, it's probably dead?

Vittorio A. Colao

So why don't we do, Philipp, first question; Steve, about the integration of cable and mobile; and then I take the Brussels one?

Philipp Humm

Yes. So let me start with the -- with Italy. So I think the good news in our eyes in Italy is that the price war right now has -- is over on the gross adds side. So we have now a different price level in the markets. We are focusing ourselves on the EUR 15 price level, which is significantly higher from what we were before. So in that sense, we are positive, as we are not the only one but also Wind and Tim are now on similar price levels that the market is going to recover. That being said, we still have a certain drag on our cost -- on our base rates as the price decrease washes through in the coming quarter and probably the quarter thereafter. And then we should see some positive trending coming through. On cable?

Stephen Charles Pusey

Justin, it's Steve here. Just on the integration question, the cable assets offer a very nice depth of fiber. So there's a great synergy on the integration of the two core networks: metropolitan fiber, which is traditionally very difficult to dig, especially in city centers; and capacity needs of both properties. In addition to that, we can extend very economically the existing fiber of a cable operator to our own base stations, which is of course part of the plan; and then of course a consideration of using the fiber assets to reach enterprise customers where we don't currently have reach. So from a physical point of view, it's a great set of assets. Of course then, you get the opportunity for the quad play or multiscreen delivery of content and services, which is something we can easily extend to. So yes, we are very happy about it, very pleased, and it is as expected in that regard.

Vittorio A. Colao

Yes, on Brussels, let me say I'm not sure I would define dead, as you did, the package. I think the package has some very positive aspects and some other aspects that I wouldn't call positive but I would say are still to be clarified and complicated. The clarifications and the final direction has to come from interactions between the commission, the Parliament and the local countries, member states, which are complicated, especially in an end-of-term phase. So I don't know, there is a possibility that they might rush through. There is a probability that it will have to take longer time and go into the next Parliament. But having said that, on the key aspects of it, on roaming, we are moving ahead anyhow. As I said, we have more than 10 million customers using our roaming packages. Roaming is going up 130%. We are including roaming more and more into our own packages. On access to fixed line, we are fighting our battles locally. We have got some nice wins in places like Italy. So for what Vodafone is concerned, we continue to play our game in all possible -- our match is played in many different stadia and we will continue to play there. If the package goes through earlier or later, we will simply adjust our game to that. But I don't think that, that will impact our strategy implementation whether it is this side or the other side of the commission or the new commission.

Operator

Our next question is from the line of Jerry Dellis at Jefferies.

Jeremy A. Dellis - Jefferies LLC, Research Division

I've got 2 questions, please. First question is on Europe. I wondered to what extent the stronger net adds, contract net adds, that you've been reporting in Europe have been supported by higher A&R spend. And should we be expecting margins to be trending down maybe a bit more sharply in the second half than we saw in the first half as a result? And then the second question is really on the emerging markets. I think your organic revenue growth is typically trending below inflation in several markets like South Africa, Turkey and Egypt. You've also got weakening currencies to deal with there. And I presume that inflation is having -- putting some upward pressure on the cost base. So the question for the emerging markets is really, what flexibility do you have to cut harder into the cost base in some of these countries? And in particular, on labor costs, what flexibility is there in that area? And I'd be interested in whether there are any particular countries like South Africa perhaps where the unionized proportion of the labor force is particularly hard, which might reduce your flexibility?

Vittorio A. Colao

So first question, for the CFO. Second question, for the head of emerging markets, who is becoming a CFO.

Andrew N. Halford

All right. And so yes, we are spending a little bit more on A&R. I think, when we talked in November, we said that, that was what we expected to do, particularly in Germany. And consequently, yes, the margin will go down a bit more in the second half. But all of that is within the guidance for the full year, and hence the unchanged profit guidance.

Nicholas Jonathan Read

And Jerry, it's Nick. Just on emerging markets, what I'd say is I mean I think you summarized the challenge nicely, which is, obviously, with currency devaluations, you do tend to get pressure on inflation in markets. I think we work very hard to drive a number of efficiencies in channel management around our A&R, use of technologies. We don't particularly have, if you like, big unionization that we face. And I think you saw in our first half performance margins moving strongly up. So it's a balance between cost efficiency. And also, we take selective actions in terms of hardening pricing, which you see, in India, as an example, quarter-over-quarter, our pricing was up 1.5%.

Operator

Our next question is from the line of Robert Grindle at Espirito Santo.

Robert Grindle - Espirito Santo Investment Bank, Research Division

It sounds like, on the KDG transaction, the dominant -- domination agreement is coming shortly. Will we hear then about the timetable for the execution on the synergies? Or does that sort of come later in the year when you're sort of fully in there? And then just on South Africa, the MTR cut. If the cuts do go ahead of the proposed level, roughly what is the impact on the growth in the South African business?

Vittorio A. Colao

So I would say again, Andy and Nick.

Nicholas Jonathan Read

Well, it's Nick. I'll take the first one in terms of South Africa. Obviously, the -- you know that we are going to legally challenge. And we're challenging because we feel that there was a very specific process laid out under the electronic communications act to determine the MTRs and we don't think this process was followed. So we think we have strong grounds for a challenge. However, to your point, what's the impact? It's about ZAR 1.9 billion on the service revenue and about ZAR 1 billion at the EBITDA level if they were to go through.

Vittorio A. Colao

So I better have Philipp answering this question given it is a German regulation thing.

Philipp Humm

That's right. Thank you, Vittorio. Robert, on -- so on KDG, we expect the DPL to be voted positively by the shareholders on the 13th of February when we have our AGM. Then it still needs to go through the registry, which would be somewhere in May, June time frame. And once that is done, then we can obviously give you an update then on the synergy timetable.

Operator

Our next question is from the line of David Wright at Deutsche Bank.

David-A Wright - Deutsche Bank AG, Research Division

Just a question on Germany, really. I mean, obviously, that was, I think, the sort of standout disappointing number in the quarter. You did announce good contract adds. Should I be assuming that they came late in the quarter with a bit of a -- with a sort of fight-back? Are your new tariffs and products in place right now to sort of go more head-to-head with Deutsche Tel? And as such, should we be expecting a recovery this very next quarter? Or is this something that might just take a little bit of time to get traction back?

Philipp Humm

Yes. No, thank you, David, for your question. On overall, we see now an improvement in net adds quarter-by-quarter, all right? So we started being positive on contract in the first quarter, and now we're significantly ahead, with 123,000 net adds in this quarter on postpaid. So we want to continue that and so we expect that to continue overall. That being said, we still have a drag on ARPU as we still have a price pressure there, right? So the 2 things need not net out over time but we will still have a pressure on our overall revenue.

David-A Wright - Deutsche Bank AG, Research Division

So I mean is it something that you'd be -- you'd go as far as to sort of guide us to going worse before it gets better? Are you able to do that?

Philipp Humm

Yes, no, I think I mean we should be pretty much bottoming out right now, and so we should see over time then a step-by-step recovery.

Operator

Our next question is from the line of Andrew Beale at Arete Research.

Andrew Beale - Arete Research Services LLP

It's a question around the excess capital that you might have post the Verizon transaction and your large investments in Project Spring. I guess I'm just asking, at a high level, where do you currently foresee that you might get the highest return? Is it from doubling down to protect or enhance the big European markets? Or is it from expanding or consolidating an asset within [ph] the year? And how are you just going about weighing up the competing requests for M&A capital that I imagine you have from your individual country operations and thinking about those against buybacks? And then the second question is just going back to your stricter view of 4G access in MVNOs. What is your view on your competitors' attitude to 4G MVNOs? Do you see that changing such that you couldn't be confident in sticking to your values and not moving out? Or are you still seeing warring deals being done?

Vittorio A. Colao

Let me start with the second question and then move to the first one. Maybe, Andy, you can take the first one given that it's really about benchmarking returns and the discipline in use of capital. Andrew, I cannot give you a completely uniform answer. And I don't want to be judgmental on my competitors' strategies because, at the end of the day, everybody has different shareholders and reasons and thinking and whatever. The -- what we have seen is that some competitors have taken, I would say, what I would call a healthier approach. So in the moment where we are all talking about investor, at least some of us are talking about investing, some of us are paying spectrum very expensively, some of us are really doubling down on 4G. We are maybe at Vodafone doing it a little bit more than the others. We are talking about bigger retail investment, bigger online investments on. My vision, to be honest, for the future is that every country, we will have every market, we will have a couple of quality players. Those couple of quality players will have probably more appeal in the high end of the market or in the higher end of the market or the more technological-oriented part of the market. And therefore, they should be able to get that recognized in their own returns. Some MVNOs do that, other MVNOs don't. They're kind of cheaper, which is fine. It means that our industry is getting in a more mature stage where you don't just put people in the same box, they just look at their strategies and their things. I would say that some of my competitors have reacted the same way. You look at who is ending up where and you have pretty much a picture. But then it depends a lot market by market. So it's -- at the end of the day, if you look at the -- taking the U.K., we have network -- from a network point of view, we are sharing with O2. The other big network is EE. It's not surprising that EE is taking more of other people. At the end of the day, you will end up with 2 big networks, strong networks and then a third one that is kind of a smaller and partially hosted in another one. In Italy, you will end up, I assume, with us; and Telecom Italia, having the stronger, bigger, more fixed, more converged reach; and a third one that probably will be hosting others. So I think it's fine. I mean it's different by market. You cannot have a completely uniform answer across the piece. Andy?

Andrew N. Halford

Yes, Andrew, on the...

Vittorio A. Colao

Organic buyback.

Andrew N. Halford

Yes, yes, yes, big, big [ph] mix there. I think, firstly, on Spring, we've gone through with each of the businesses in a considerable level of detail as to where -- if they had extra money, where they would spend it, what sort of return we would get. We did not predetermine the answer to that. The answer has varied by country. Sometimes, it's been putting more into 4G, sometimes 3G, sometimes fiber rollout, sometimes retail. But we have then stack-ranked those and we have gone through them, and I think where the money is now directed is very much aligned with where we can get the greatest return. The M&A side, if that was also a part of your question, I mean, clearly, we have been very thoughtful. We have been very selective about that over the last few years. And that same integrity and approach will apply to anything that we do going forward. Yes, we do look at the returns on that against doing buybacks. And I think the evidence over the last few years has been that we've got a good mix there of returns both to shareholders, and capital returns and investment returns within the business, organic and inorganic and that I see no reason why that shouldn't continue going forward.

Andrew Beale - Arete Research Services LLP

And at a high level, do you think that you have more opportunities of, like in M&A terms, controlling [ph] down in Europe, or in the emerging markets?

Vittorio A. Colao

That's not really the way -- sorry, this is Vittorio. This is not really -- how can I say that? I mean it depends on -- I mean, M&A, we are not talking about a fluid commodity type of market that every day you watch a price on the screen. And I mean it depends on circumstances, it depends on what's available. It depends on so many things that, how can I say, Europe one -- I mean, Europe, clearly, there is a trend towards consolidation. Now how much this trend will be allowed or actually even helped by the regulators is still to be seen. But clearly, the industry is talking about consolidation, mobile to mobile, fixed to mobile, cable to fixed then cable to mobile. So clearly, things should move there. Emerging markets, there are places like India that clearly need to have consolidation. There are places like Africa where clearly some operators are not having the returns that they were thinking about and so maybe they will sell. But then, will they sell at a reasonable price, or not? I don't know. So it's difficult to give an answer one against the other.

Operator

Our next question is from the line of James Ratzer of New Street Research.

James Ratzer - New Street Research LLP

I have 2 questions, please. The first one relates to uplift to ARPU from this migration to LTE. I was just trying to get a little bit more handle on what is actually happening on an underlying basis. You've shown some numbers in the U.K., ARPU of GBP 32 going to GBP 38. I mean are you able to give a steer on what the migration is actually on a like-for-like customers? Is there a similar ARPU uplift? And what are we also seeing in markets like Germany and Italy as well? And then the second question is regarding your guidance. So you've kept guidance for operating profit and cash flow intact. My guess would be that the underlying revenue trend might be slightly weaker than you've penciled sort of into your budget at the very beginning of the year when you said you're spending more on A&R. Does that mean we can impute that you've been more aggressive at taking out operating costs in Europe? I think you'd initially guided to GBP 300 million. Is there upside to that number for cost reduction? And what does that say about ability to reduce costs going into next year as well?

Vittorio A. Colao

Philipp, on ARPU trends. And maybe, Andy, on guidance.

Philipp Humm

Yes. So James, the -- to answer the question is, right now, a bit difficult because we are still in early phase and we need first the ARPUs to stabilize so that we have a full comparative number. So I think the next time would probably be a better time to give you a very solid answer. And let me just give you directionally 2 answers then. If you look at the U.K., we see that we seem to have a good ARPU uplift right now by being able to upgrade customers into 4G with content and with additional data. So that seems to work out. In other countries, what 4G helps us to do is also to simply protect our richer Red plans and, by doing that, being able to sustain these price points in the markets. That's the example of -- for example, of Germany where we have LTE included in our Red plans but not included in our entry plans which we call the smart plans in Germany. But it's also there, it helps us sustain a higher ARPU. So it's a little bit different market by market, but bear with us for probably another quarter for a good answer on the U.K.

Andrew N. Halford

And James, on the guidance, so you will understand, trying to guide across 30 markets 12 months ahead, there are many, many moving parts that go into that. Yes, European revenues and when they're going to pick up was one of the conundrums at the start of the year. Conversely, the AMAP businesses have been performing very well. Yes, we're absolutely chasing out every bit of costs that we can in the business. We are putting a little bit more into A&R, but we're comfortable that we're within that range overall for the exit for the year.

Operator

And we'll now go to the line of Stephen Howard at HSBC.

Stephen Howard - HSBC, Research Division

I had a couple of questions relating to Project Spring and also back to this MVNO issue. On Project Spring, what signs are you detecting about the likely responses of your rivals? Do you see indications of counter-investment projects, for instance, or any other signs of response from perhaps those who can't afford to spend more? And then just returning to the issue of MVNOs. What I suppose I'd really like to know is what has happened specifically to those MVNOs whom you have in effect declined to host going forward? Have they been able to obtain the terms that they originally wanted to get from you from someone else instead, or not?

Vittorio A. Colao

Yes, let me -- Vittorio here. Let me take the second question. The -- in order to answer the question, the second question, I should have visibility on the contracts that the MVNOs has -- have got from others. So I can only tell you what is the last point where we broke the negotiations. I cannot tell whether the other were 5% or 30% better. Clearly, they must have obtained something from others that we were not willing to give either in terms of price or in terms of access to LTE or in terms of speed or in terms maybe of conditions, so -- or bulk versus per-SIM or whatever, but I don't know. I don't know how to answer the second question. It would be difficult. On Spring, I would turn it to Steve. The one thing that I can say, I am pleased. And to some extent, I have strong comfort on the good response that we have got from the vendors, the existing ones and, to be also honest, from possible others. So the equipment world is alive and kicking and competitive. And this, of course, is a great opportunity for us to renegotiate also existing things. So for me, Spring was also a great opportunity to take a little bit of dust off our price books, not that we had a lot of dust, Steve, but...

Stephen Charles Pusey

Thanks, Vittorio. Stephen, it's a little early to see if there's any competitive response other than previously announced programs for competitors. And we haven't seen anything unusual or different that's notable, to my observation. Of course, we're forging ahead and we -- the magnitude of the program really kicks into gear in April, but we're forging ahead in some countries, India and Germany particularly, but nothing unusual thus far.

Stephen Howard - HSBC, Research Division

And Vittorio, just to return to that question on MVNOs. Obviously, I appreciate you don't have sight of your rivals contracts, but you might be able to infer something from the pricing structures of the MVNOs in question.

Vittorio A. Colao

Listen, I don't know. It's difficult. Let me say again what I said. What was important for us was, one, there is a new technology for -- called 4G and there is a higher speed that we are enabling our customers through, thanks to the 60% of high 3G that now we have. If you want to be a part of Vodafone and access those, please pay your ticket for the lunch. Don't try to get the free dessert just because the dessert is already on the table. And some of them are happy to do that, and others say no. So that's one side of the story. The second side of the story is conditions that -- and this is very strategic, I think, for the sector. Conditions at which you wholesale have to be built in a way that allows the -- your own retail pricing to be effective. If you give away with contracts that allow re-staking, betting and strange things that completely undermine your price, then quite frankly, for 50 million, 60 million, 70 million per year, even 100 million per year sometimes, it's not worth. I mean we are running markets which are billions in revenues. We cannot for 50 million or 60 million or 100 million in MVNO revenues undermine the whole thing, and this is the more strategic long-term aspect. So it's hard to me to say what others agreed to because I don't know. I mean, clearly, they didn't agree with us.

Stephen Howard - HSBC, Research Division

But were all the MVNOs in question advertising that free dessert, I guess, is -- to use your language, would be the question.

Vittorio A. Colao

Not mine, for sure. If somebody wants to say, "Same quality as Vodafone but for a much better condition," they will not be able to do it now. In the future, still for a few days.

Operator

The next question is from the line of Ottavio Adorisio of Soc Gen.

Ottavio Adorisio - Societe Generale Cross Asset Research

I have a couple of questions, if I may, and a clarification. The first one, it's a follow-up from previous questions, it's on Project Spring. In the past, you've been very vocal about Vodafone ability to invest and willingness to invest significantly during the downturn when a number of your competitors in Europe had to restrain the budget due to balance sheet constraints. However, by looking at your current growth trends, I have not seen that past investment efforts have yet provided pricing power as pricing pressure accelerated where your market shares number can't be are [ph] reducing. I was, therefore, wondering if you can share with us what gave you confidence that Project Springs may have a different outcome. The second one, it's on basically on the stock. In the press release, you mentioned a few times the negative impact from pricing pressure in Europe. I was, therefore, wondering if you can comment if the launch of the Red tariffs may have trigger or at least accelerated pricing pressure, and what may alleviate this pressure going forward. And in terms of the clarification, x MTR, it looks like service revenue may have deteriorated from second quarter into the third quarter. This quarter is around 7%. I estimate that last quarter was between 5.5%, 6% full, and I would be grateful if you can confirm that was the case or not.

Vittorio A. Colao

So first of all, a clarification. On the clarification, you're talking about Europe, right?

Ottavio Adorisio - Societe Generale Cross Asset Research

Europe.

Vittorio A. Colao

Okay. So my colleagues can have to look at your numbers while I take the first question. And maybe, Philipp, you take the Red question. What gives me confidence that this time is the right time? First of all, there is a big discontinuity. So data, as I said, is picking up and data is much more quality sensitive than before, especially with video and with music. So these are experiences that require continuity and required in ubiquity because they are more linked to the entertainment part of our lives, first. Second, I'm not sure you can completely link the fact that we invested in the past with pricing pressures and things like that because the reality is that these things play out in the long term. Keep in mind that a lot of our investment also went into emerging markets in the past years. Not you personally, some people were doubtful that our investment in India, for example, was a good investment. Now we are all here saying EBITDA margin higher than Europe, growth double digit and amazing customer loyalty and performance. So not all the investment went into Europe actually. A lot of it went into emerging markets, but also these things take time. I mean same conference call 4 years ago was, "Why on earth are you putting money into Turkey and into India?" So we are a long-term sector. These investments pay out in the longer term. I am really confident that, 3, 4 years from now, people will say, money well spent. 3G high speed, 4G, we will start talking about 5G probably in those days, fiber, money well spent. Fiber, quadruple play in Portugal, in Spain, possibly in Italy, will be seen with different eyes, but we need to take longer time frames in our sector. Philipp, pricing of Red was the nuclear bomb in Europe, or not?

Philipp Humm

Let me come to the question in a second. First, on the MTR clarification. We have a -- we go from a 7.3% minus to a 7.8% minus, so a slight worsening but not really of significance. On the question on the nuclear bomb, as Vittorio just said on Red, I think Red, for us, is strategically very, very important because it increases our share of in-bundle revenue and thus makes us more protected going forward as from a Red plan point of view. We saw, as Vittorio has shown on his slides, some inward -- some migration pressure, in particular in the early years or in the early months of Red, which are easing out right now. Now the difficulty in answering your question really thoroughly is that in every single market, the whole thing is overshadowed by so much bigger pricing moves we have in the market. Take Spain, we'll -- or Portugal, where we have very strong converged offers in the market being very, very aggressive in the marketplace. Take Italy, where we had a very aggressive price war on prepaid, which now has eased off. Or take Germany, where we have price pressure coming from the MVNO and from the price entry areas, all right? So there are many other factors which are simply overlaying, which makes it very difficult then to give you proper, analytically sound answer.

Ottavio Adorisio - Societe Generale Cross Asset Research

[indiscernible] follow up on that one. You clearly -- in a previous question, it was -- you went through the fact that, of course, you have to reprice the base. That's pretty straightforward. My question was referring on the competitive response on the fact that, since you launched Red, are you seeing in a number of markets a response from your competitors whom are bringing their own pricing down? That what I was really then asking.

Vittorio A. Colao

Can I take that? The issue is not the pricing-down. I think, let's face it: we were -- or we are still partially in an -- in emerging markets, we are still in a metered voice-SMS world. We all know, you know, I know, we all know in this call that the technology underlying is going in a different direction, which is going to be data and it's going to be undifferentiated data packets determining different forms of communication and that customers actually want this. And the collapse in SMSes that we are seeing is clearly indicating that the time of SMS is gone. Now what we wanted to do with Red is to act before the same happens to voice. And actually, the increase in voice usage that we have on the Vodafone Red plans actually proves that, once you take away this, let me say, arbitrage opportunity, actually, people are pretty happy. So it is really a change in pricing model. Some competitors have followed, other competitors followed in a different way. To be honest, some markets were already there, like the U.K. U.K. was already at rather unlimited levels. So I don't think Red is dragging down or triggering more competition. Of course, you have in some markets more dilution than in other markets, but this is a big evolution, a big transition. And as we said, we already have a last -- a vast part of our revenues in Europe coming from bundles, whether they are prepay or postpay. And I think that's healthy because it takes away a lot of interest to move to VoIP and to other communication banners. Or if they do, we are not hurt because if people from free -- with free SMSes actually use WhatsApp, then be it, we don't care.

Operator

Our final question is from the line of Mandeep Singh at Redburn Partners.

Mandeep Singh - Redburn Partners LLP, Research Division

Just a couple of quick ones, one on Spain, one on Italy. On Spain, you're seeing some contract net adds. Can you say that's really down to your improved commercial performance with respect -- I mean versus the market? Or do you think the market's in the sort of -- is somewhat bottoming out? So that's the first question. The second question is regarding Italy. Obviously, we've seen some improvement in the low end of the pricing environment. It's going to take some time to wash through the base. But more interested in the sort of consolidation outlook: would you be willing to facilitate consolidation in Italy's? Let's say hypothetically there was a merger or merger proposal between Wind and Hutchison, would you help facilitate that in terms of buying spectrum, buying towers, things like that?

Vittorio A. Colao

The answer to the second question is, rationally and at the right price levels, yes. Answer to the first question is probably more articulated.

Philipp Humm

Yes. To the first question, it's a little bit early to tell right now. We believe that we made some inroads now this time within the quarter, in particular in the last month, in December. So we're quite positive that our commercial activities are paying out in a positive way, but we will have to see when the numbers are published over the coming weeks whether that has really been fully the case.

Operator

And that was the final question. May I please pass the call back to you to close?

Vittorio A. Colao

Thank you. I will let Andy close this conference call this time.

Andrew N. Halford

Well, thank you. And I think this is my 35th close or 35th involvement in the quarterly or half yearly results, so I do appreciate all of your questions which have kept us well on our toes.

And I think the summary for me would be, yes, Europe is still tough, but there are a number of reasons to be a little bit more optimistic going forward. The demand for the product is clearly very strongly there, data and volumes going up, minutes going up, et cetera. You've seen the customer growth improving, 4G now starting to come through not just network build but customers and revenues and the MTR effects starting to lighten as we go forward. In AMAP, the momentum that we've had for the last several quarters, really continuing, and we are still very much in the early stages of the whole data experience in many of those countries. So again, looking forward, I think, grounds for being very comfortable with our positioning there. Unified comms, progress in a number of markets there. And once KDG is fully on-boarded, then a lot more opportunity in that space. And then finally, with the Verizon deal closing and the considerable re-profiling of our balance sheet, the improvements in our dividend cover going forward and particularly the GBP 7 billion that we can now spend to really improve our position as we go forward, I think, are all very solid reasons to be very confident about the future.

Thank you very much.

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