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Executives

Andrew N. Halford - Chief Financial Officer, Executive Director and Member of Executive Committee

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

Stephen Charles Pusey - Chief Technology Officer, Executive Director and Member of Executive Committee

Michel Combes - Director, Member of Executive Committee and Chief Executive of Europe Region

Nicholas Jonathan Read - Chief Executive Officer of Asia-Pacific & Middle East Region

Analysts

Timothy Boddy - Goldman Sachs Group Inc., Research Division

Robert Grindle - Deutsche Bank AG, Research Division

Nick Delfas - Morgan Stanley, Research Division

Andrew Beale - Arete Research Services LLP

Justin Funnell - Crédit Suisse AG, Research Division

Simon Weeden - Citigroup Inc, Research Division

Akhil Dattani - JP Morgan Chase & Co, Research Division

Stephen Howard - HSBC, Research Division

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

Paul Marsch - Berenberg Bank, Research Division

Jeremy A. Dellis - Jefferies & Company, Inc., Research Division

Darren Ward - Echelon Research & Advisory LLP

Ottavio Adorisio - Societe Generale Cross Asset Research

Antoine Pradayrol - Exane BNP Paribas, Research Division

Nick Lyall - UBS Investment Bank, Research Division

Maurice Patrick - Barclays Capital, Research Division

Vodafone Group Public Limited (VOD) Q1 2013 Interim Management Statement Call July 20, 2012 4:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Vodafone Group conference call. Today's call is hosted by Vittorio Colao, CEO of Vodafone Group; and Andy Halford, CFO of Vodafone Group. Please go ahead, Andy.

Andrew N. Halford

Thank you, operator. Good morning, and welcome to Vodafone's interim management statement call for the first quarter ended in June. I will take you through the financial highlights before handing over to Vittorio, who will update you on the strategic developments and comment on the outlook before moving to Q&A. For that, we'll be joined by Nick Read, Michel Combes and Steve Pusey.

So let me start on Slide 3, highlights of the quarter. Group service revenue grew 0.6%, which is just over 2% excluding MTRs. This growth is slightly less than the previous quarter due firstly to the boost in the prior quarter from the extra day in this leap year. This was roughly 1%, as well as continuing difficult conditions in a number of our European markets, offset by strong momentum from our AMAP region. Data grew by 17% driven by the increase in smartphone penetration, which is now nearly 29% in Europe.

In enterprise, growth slowed this quarter to 0.1% as competitive and macro pressures in Europe deteriorated, offset by accelerating growth from AMAP. We continue to see a healthy demand for enterprise services in fixed and data, and our VGE business continues to grow strongly. In Verizon Wireless, service revenue grew over 8% during the quarter, and the results they reported yesterday continue to highlight their very strong wireless performance and cash flow generation.

We also continue to generate strong cash flows. Today, we reported GBP 0.9 billion of free cash flow for the quarter, which has contributed to the lower net debt of GBP 22.7 billion. We are now very close to completing the GBP 6.8 billion share buyback program.

Finally, we have made a number of moves during the quarter to enhance our network and build our business. We have announced the acquisitions of fixed line assets in the U.K. and New Zealand and signed or extended a number of network sharing agreements in Europe and Australia. Vittorio will touch on these later.

On to Slide 4. Here you can see our regional performance for the quarter. Europe declined 1.6% on an organic basis. However, once we remove the impact of regulated voice termination rate cuts, Europe was flat. Some of our markets in Europe remain very challenging, and in particular, we saw a deterioration of trends in Italy during the quarter, which I will explore in more detail shortly. In AMAP, growth of 6.1% increases to 7.9% when the MTR impact is excluded. Momentum in AMAP continues to come from growth in customers and data.

For the group, overall, the regulatory impact represented 1.7 percentage points of lower growth in the quarter. Of course, this has also partially reduces our costs. During the quarter, we saw further voice MTR cuts in Spain, the U.K., South Africa and New Zealand. The growth in data and fixed revenues continues, although messaging has now moved into negative growth territory along with voice revenues. CapEx for the quarter was GBP 1.1 billion, and free cash flow, as I mentioned earlier, was GBP 0.9 billion. I'll cover these in more detail later.

On Slide 5, let's take a closer look at the service revenues from our individual operating companies, and I will select a few countries to discuss in more detail. Ghana continues to lead the group with the highest growth. Whilst this is a small country in the overall context of the group, we are very proud of the performance in Ghana. Turkey continues to demonstrate operational excellence with strong growth across all segments. We have seen strong competition in all consumer segments in the market, but we have delivered particularly well in mobile Internet, which has driven data revenue growth of 69%. Turkey now has 18% smartphone penetration, up 9 percentage points from a year ago.

In the enterprise segment, following the acquisition of Koc.net, we have been able to launch a range of innovative propositions in the Total Communications arena. India grew at 16% in the quarter with competitive intensity increasing in a number of circles. ARPU continues to grow due to increased penetration of the new pricing plans alongside greater customer activity. The consumer protection regulations launched in the quarter have had a negative impact on revenue performance. We continue to wait for details of the new telecoms policy to be confirmed, which have been delayed until the summer this year.

The Vodacom Group delivered service revenue growth of just under 6%, with growth of nearly 40% coming from the international businesses and healthy customer growth for the group. In South Africa, data growth remained strong at 10% in the quarter with the growth in data users and usage offsetting the intense data pricing competition. Active data users now represent 46% of the customer base in South Africa.

Germany. Against the backdrop of continuing GDP growth, German service revenues grew 4%. There was no MTR impact this quarter. ARPU growth of 4% was supported by the increase in smartphone penetration, which in turn delivered strong data growth of 20% and messaging growth of 8%. We continue to execute well in enterprise with strong growth coming from the mobile and fixed segments. On to LTE. We now have 193,000 customers, including 20,000 LTE mobile customers and household coverage in Germany of approximately 35%.

U.K. growth declined for the quarter by 0.8% or grew 2.3% excluding MTRs. Consumer confidence remains weak in the U.K., and price competition is increasing. Customer growth is slowing in the contract segment, although we have successfully reduced contract churns to help mitigate this impact on our revenues. Data growth of 4% continues to be driven by growth in mobile Internet and email revenues.

Netherlands. Unfortunately, as you know, our business in the Netherlands suffered in April as a fire in one of our network locations in Rotterdam disrupted services to our customers. This had around a 3 percentage point impact on growth for the quarter. Reported service revenue for the quarter declined 1.5% or grew 1.5% if you ignore the impact of the fire. Underlying performance is positive, with strong contributions coming from enterprise and consumer contract.

As I mentioned just now, conditions in Italy have deteriorated further during the quarter, and we have seen the impact of this reflected in our service revenue, which declined 7.7% or 5.5% excluding MTRs. Mobile-only service revenue declined 8.3%, and fixed revenues declined 3.2%. Enterprise also declined 2%, though we continue to have great success in Italy with the Vodafone One Net proposition. During the quarter, we saw lower usage across all the segments and higher churn with customers increasingly optimizing their spend. Data revenue grew 11%, driven by increasing smartphone penetration and strong mobile Internet growth. As a reminder, Italy is facing a large MTR cut in the second quarter this year, which will have a negative impact on reported revenue through the rest of the year.

Moving to Spain. Service revenue declined 10% or 8.1% excluding MTRs. The macroeconomic environment remains very tough, and the market continues to see strong price competition. Against this tough backdrop, we have introduced a new commercial model by removing acquisition subsidies and increasing our focus on retention. Customer usage continues to decline year-on-year, and customers are increasingly optimizing spend. Smartphone penetration is now 41%, up 11 percentage points on last year, and these, in turn, are driving mobile Internet and data revenues, which grew 88% and 25%, respectively, in the quarter. Fixed revenues grew 10%.

And finally, Australia. Unfortunately, performance here remains weak as brand perception and customer switching to low tariffs continues to impact service revenues.

Now on to Slide 6 for a look at the results for our Europe region. The Data Drive is ongoing with growth in data revenues of the region of 18%, fueled by rising smartphone penetration, now at 29%, which is delivering strong growth in mobile Internet revenues, up 47% in the quarter. And bottom left, you can see a few developments in the consumer segment. As a general trend, we have seen consumer contract holding up quite well, sustained by the migration to smartphones and growth in data. However, prepaid continues to be a noticeable weak spot.

In Spain, we have removed acquisition subsidies, as I mentioned. This has had a positive impact on acquisition cost and churn but has reduced our share of gross adds in the market. We continue to monitor market developments closely.

In roaming, we are seeking to leverage our broad geographical footprint by introducing new user-friendly roaming plans across most of Europe. For roughly EUR 3 or EUR 4 per day, our customers can take all the benefits of their domestic tariff with them when they travel.

And finally, we have launched the Smart II, a high-quality, low-cost Vodafone-branded smartphone which is available in the U.K. at GBP 70, a clear drive to encourage higher data usage throughout our customer base whilst keeping the profitability of the migration to data healthy.

On the enterprise side, we have seen mixed performance. Growth continues to be good at VGE and on our unified communications platform, One Net. On the other hand, macroeconomic pressures in Southern Europe have seen an increase in competition of falling SIM numbers and reduced usage.

Now if we look at AMAP on Slide 7. We have 259 million customers in AMAP, and 154 million of these are in India. Customer growth continues to drive revenue growth for the region overall. The data penetration remains relatively low. It is growing well and therefore represents a significant opportunity for this region. We continue to expand our services to differentiate our proposition and drive the safe adoption of data throughout our customer base.

In the consumer space, we are seeing increasing voice competition in the relatively high-priced South African market and continued pressure in data. During the quarter, we have introduced integrated smart tariffs in South Africa.

In India, 3G data plans were reduced during -- sorry, 3G data prices were reduced during the quarter. However, we still see the vast majority of data usage and growth coming from 2G data services, supported by the Opera Mini product.

And finally, in Australia, here we have yet to see any signs of turnaround in the business performance following the network problem some time ago despite our significant investments to restore the network and services to satisfactory operating levels. We have also seen customers switch down to cheaper tariffs. We do not expect to see any meaningful turnaround in the results from Australia for the next 12 months.

Now on to Slide 8 for the group's free cash flow. We generated GBP 0.9 billion of free cash flow during the quarter, which is GBP 0.3 billion lower than the prior year due principally to the timing of dividends. In the first quarter in the prior year, you will recall we received the final GBP 0.2 billion dividend from SFR. And in the first quarter this year, we paid GBP 0.2 billion of dividends to our minorities in Vodacom in Egypt, which were paid a quarter later last year. As you know, we are also experiencing a weaker euro environment, which adversely impacts our sterling reported free cash flow.

Net debt fell during the quarter to EUR 22.7 billion, boosted by the GBP 1.5 billion final tranche of proceeds we received from the sale of the SoftBank assets. We spent GBP 0.8 billion on buying back shares during the quarter, and our GBP 6.8 billion share buyback programs are now almost complete and should end in the next few weeks. Finally, we have, today, reconfirmed our guidance ranges for the year.

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

Vittorio Colao

Thanks, Andy. Now let's look at our revenue mix on Slide 9. The chart on the left shows the progress we are making with the adoption of integrated tariffs across our principal European countries. You can see that we now have 50% of consumer contract revenues from our top 5 European countries coming from integrated tariffs, up from 32% one year ago. The U.K. continues to take the lead in this field with success from the data test drive trial contributing to the seamless transition of customers into the data world. If you move on the right of the slide, you can see exactly where our mobile service revenues in Europe come from. Now only 16%, the purple part, of our service revenues in Europe are out of bundle or incoming, and this has decreased from 18% one year ago.

Moving to Slide 10. You can see that the growth in traffic volumes on our network in Europe continues to accelerate as smartphone penetration increases and growth from LTE fixed line substitution picks up. This increase in traffic also reflects the work that we have been doing to increase baseline speeds across the network, which is the bottom left-hand graph, showing the clear correlation between the customer experience and appetite for data.

We have progressed the rollout of single RAN across our global network, and now, we have 38% coverage in Europe and 18% coverage in AMAP. As you know, this makes future network upgrades very cost effective as well as reducing the network operating costs that we incur to date. We have also increased the penetration of high-capacity backhaul in our network as we prepare for the Supermobile future. Now 46% of our sites in Europe are connected to high-quality backhaul, and this is up 5 percentage points, as you can see in the chart, from the last quarter.

The 2 acquisitions we have recently announced both bring additional capacity and capabilities into the group, strengthening our market position in the U.K. and New Zealand and offering further opportunities to grow our enterprise business. And finally, you will have seen that we have announced several network sharing deals recently, including the sharing of active infrastructure with our peers in the U.K. and Spain. Here, we take a pragmatic approach to this form of consolidation, lowering our cost base, accelerating the deployment of new technologies and reaching more of our addressable markets.

As a wrap-up, last slide. Rather than summarizing the progress we have made against our strategy, which continues to be good, I would like to share with you how I am looking at the remainder of the '12, '13 fiscal year.

Firstly, looking at our markets and the impact of the economy and competition on our performance. The good news here is that our 2 largest markets in terms of financial exposure, Germany and the U.S., are showing healthy trends with attractive market structure and a very clear demand from LTE. Southern Europe, however, remains a major concern with weak economies and ongoing, sometimes worsening, competitive pressures from smaller operators and especially from MVNOs. MTS continue to create an unwelcome headwind, with the impact worsening as we go through the rest of the year.

So our response to these challenges is to make sure that we remain supertight on cost, rationalizing functions and infrastructure across borders whenever we can and to continue to invest in high-speed networks and improved services to build differentiation and monetized data appetite and the demand that I have shown. We also need to maintain our good work in integrated bundles and make sure that we address all segments of the market with our offers with things like the low-cost phone that Andy has mentioned.

Looking at industry developments, the lower part of the chart, we see recent announcements from the fiber networks as significant and potentially positive. However, we will be very vigilant to ensure that equivalents is genuine and constantly pressure tested to make sure that no price or operational squeeze can occur.

On the terminals and the consistent side, we see prospect for increasing appeal of different operating systems and handset vendors, particularly as the number of LTE devices, phones, dongles, tablets, increases. But this also brings threats from over-the-top applications and new alternative communication platforms. We will have to be smarter and more commercial in our ability to manage the U.S. mix in our business in a profitable way and again, continue to push integrated tariffs and bundles.

And finally, new services, though small, will continue to grow quickly. We are leading here in mobile payments and machine-to-machine and in other innovations, making the right industry alliances where necessary and building scale and capabilities. This will also remain a key focus for us going forward.

So I thank you for listening. Now with Andy, Michel, Nick and Steve, we are very happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tim Boddy, Goldman Sachs.

Timothy Boddy - Goldman Sachs Group Inc., Research Division

I wanted to ask a bit about some network quality and your Supermobile strategy. And it'll be helpful just to understand how your network sharing, I think you described it as a pragmatic approach, how that relates to the ability to achieve differentiated network quality. Also, if you could talk a little about perhaps quantifying some of the savings and the timing we can expect those savings from the deals, that would be helpful. Secondly, I just wondered, it will be helpful to get your perspective on the recent next-generation network announcement from Brussels and whether this causes you to feel concerned about your position as un-bundler given the pricing freedom or rather the -- I guess the new approach to pricing fiber that is being offered.

Vittorio Colao

Yes, Tim. Let me take the first and the last part, and then pass to Steve Pusey, who is here or Michel, depending on who wants to take it, the network savings part. On the pragmatic approach, it is what I described, pragmatic. We -- first of all, passive sharing doesn't really impact any -- in any way the quality of the network, and most of our agreements are passive. Active sharing, like the one in the U.K., of course implies that at the radio level, you will have the same experience as the others. First of all, there's more that you can do at the core network level and the service level. But also, as I said, we have to be pragmatic. In the U.K., the difference in number of sites and investment that would have been required in order to deliver a competitive coverage and the competitive quality, the investment was too much relative to what was reasonable to think as a return. So as I said, you will differentiate the service. We will differentiate in other ways. So pragmatism and financial discipline I think are 2 good principles. On the savings, I will let Steve give you. Let me go straight to the NGN Brussels thing. We are not concerned. I've used the word vigilant, I believe. Potentially, it's good news, because potentially, this will unlock investment in NGN. Potentially, it means that we'll have access to -- in Europe, to better infrastructure to carry the data that we all know will be massive in the future. I said vigilant, because contrary to what you said, the guidelines, which are not yet translated into detailed instructions, talk about equality of inputs and price squeeze tests. And I said we will be very vigilant that those 2 tests are passed. If they are not passed, well, there's going to be no real progress in that area, and I think that the commission has exactly this idea in mind.

Stephen Charles Pusey

Yes. Just Steve here, Tim. On the savings, obviously, most of our share in deals are passive as we term them, i.e. steel, concrete and site lease and rent in some cases. Although in some countries, you can't share that. So those are pretty well known I think to you. I think you're targeting the active sharing. Those, again, depending on the lease and rent arrangements and the cost of energy per country, can allow us up to a 20% to 30% saving on our operational costs depending on the arrangements in that country.

Operator

Our next question comes from the line of Robert Grindle at Deutsche Bank.

Robert Grindle - Deutsche Bank AG, Research Division

Two questions. I was wondering whether it was possible to quantify the impact of the new subsidy model in Spain. For example, is Spain mobile growth still deteriorating excluding the impact of your change in subsidy policy? And then I guess this is one for Steve. Some of the equipment vendors have reported depressing numbers, but that might not be so sad for you guys. Are you still seeing downward pressure on equipment pricing in line with what you've been seeing over recent years?

Michel Combes

Michel Combes speaking. So on Spain impact of the new subsidy model, positive signs, churn reduction and data growth and ability to increase the contracted base. You have seen in the figures which were presented by Vittorio that we raised the ratio from 8% to 29% in the revenue, which is now delivered by integrated offers in Spain. So that's a positive piece of, let's say, this new model. So more challenging piece is gross adds, which went down very significantly and which turned our net adds negative, so which means that probably in the following weeks or months, we'll have to take a few measures in order to regain commercial traction in the market.

Stephen Charles Pusey

Regarding the prices, our -- we have fixed models in the supply community which haven't largely changed on the formula that we experienced. I think most of the depressed sales come from volume around the world. We at Vodafone have consistently invested through a difficult period, because we believe differentiation in the infrastructure makes a difference and matters. So we've been pretty consistent and continue to be so, as Vittorio just said. So I think you'll find that most of the depressed levels come from volume. And the -- it is getting more competitive but no more so than the sort of the trends over the last 3 years.

Operator

Our next question is from Nick Delfas at Morgan Stanley.

Nick Delfas - Morgan Stanley, Research Division

So 2 questions. First of all, on Q2, not expecting to give a specific forecast, but we should expect worse in Italy, worse in Spain, pretty worse in India. So overall, growth should be trending possibly to the negative side. Is that a reasonable assumption? And secondly, on Germany, could you give us any clue on what the usage per dongle is that you're selling on LTE? And how many of those are actually replacing existing DSL lines, whether they're your own Arcor lines or somebody else's lines?

Vittorio Colao

Yes. Let me take the Germany question and then pass it to Andy for the detailed guidance on Q2. The -- I mean, I'm very pleased with the performance of Germany. It's a proof that there is -- and to be honest, if you link it also to the U.S., it's a proof that there is a good future on LTE. Whether this is smartphone or a replacement of fixed line, it shows that when the products are -- and services are good and fast and reliable and with little latency, customers actually like them and pay for them. We have about 200,000 -- a little bit less than 200,000 customers there, and they are all -- almost all, I would say, dongle. I mean, there's still a small part of smartphones, but it's small stuff. The usage is around 11.5 to 12 gig, which is clearly in line with the fixed line usage, and the customers are incredibly happy. On the mobile handset side and the smartphone side, it's early days. So it's -- they probably had a little bit -- using a little bit more than the normal ones. But again, it's mostly rural areas, so it's early days but positive, encouraging. Again, it shows that investing and -- like Verizon and we have done in Germany, actually, there's a new phase in front of us. Andy, detailed Q2 guidance.

Andrew N. Halford

Yes. Nick, for some reason, we've sort of avoided the quarter-by-quarter guidance. But directionally to your question, I think it's fair to say that probably, we'd look at the second quarter as being a bit weaker. The MTRs generally were lighter in the first quarter than they will be for the balance of the year, Italy in particular. The Spanish sort of situation, which Michel has just commented upon, obviously, is still an evolving feast, has a couple of lapping effects. The Netherlands while hopefully will be something that, in a small way, on the upside, will help. So I think that overall, the momentum, generally, is reasonable but if anything, will be pressure on the downside.

Nick Delfas - Morgan Stanley, Research Division

Can I just quickly come back to the German point? Are you actively offering those dongles to your fixed line subscribers?

Michel Combes

Yes. So Michel speaking again. So in terms of fixed substitution, it's more or less 170,000 customers out of the 200,000 that Vittorio was referring to. It's mainly in regions where there was no fixed line at all or where the DSL quality was, let's say, quite low in terms of bit rates that we were able to provide. We're now penetrating in urban areas, but it's still early days there. We have 2 type of offers, nomadic offers, which also is there to replace fixed access and all smartphone, as Vittorio has mentioned.

Operator

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

Andrew Beale - Arete Research Services LLP

I'd like to come back to Commissioner Kroes truce, if I can call it that, on wireline investment. I was just wondering if you're getting any vibes of a slight softening in approach towards the wireless industry as well, which might encourage you to further accelerate single RAN backhaul and so on. And then moving to India, just wondering if you now need to take a charge here for tax and how we should think about that going forward. Is there any prospect of negotiation? Or do the politics from the 2G scam preclude that? And on the spectrum side in India, do you think that the proposals to change the mix between the upfront and ongoing license fees make it any more likely that anyone will turn up to the 1800 auction?

Vittorio Colao

Yes, let me pass that sort of the India question to Andy and Nick, and I take the Kroes one. Here, I have 3 comments. First, we have a very, very positive engagement and frequency of engagement with Commissioner Kroes and her offices. And you called it softening. I really found them very understanding of the need to improve the return on capital in our industry, very understanding of the need for consolidation and also, and this is very comforting for us, very firm in wanting to have competition, which is good relative to the previous question on NGN. So I think in Europe, there is a good understanding, as I said, that we need to improve returns and things have to change. The early test will be decisions on Austria, where the other commissioner, Almunia, has to decide on the consolidation, the approval of our active network sharing, which I expect and this type of things. But I am comforted by the very, very frequent interactions we have with them and also, I want to stress again, by the fact that by introducing the price squeeze and the quality of input test in the new NGN regulation, they demonstrate pragmatism in looking for investment but also adherence to the principle of fair competition. Guys, on India, Andy, tax; and Nick, spectrum.

Andrew N. Halford

I'll start on the tax. Andrew, good question and one which we are giving some thought to at the moment, so I don't have an answer to it. The new legislation at the end of March have not actually come into effect and have not been formally legislated. Therefore, it wasn't an issue at the end of March. That has now passed through the parliament and has received a presidential approval. However, we have no further progress on it. We have not received an assessment, and we are sort of watching and monitoring developments sort of real time here. So we will be giving some thought to whether we need to provision for it at the half year. But at this point in time, I honestly do not know the exact answer to that, and the events between now and then may yet influence the answer to that question.

Nicholas Jonathan Read

Andrew, just on spectrum, I think you ask a very difficult question given the fluidity of the situation. I think the e-commerce now sort of at least come down and quantified the amount of spectrum there'll be in the auction. So I think that has now settled. I think the rules around what new entrants can have and what existing entrants can have I think is settled. The coverage obligations is settled, so it's just down to price. I think they're really struggling at the moment with trying to arrive at an amount of money they would like to extract from the auction whilst not causing a huge price increase on consumers, which will be badly received. And of course, with very high reserve prices, that's the way it would be. So I think they're struggling at the moment, and I think the timeline looks very challenging. So it's very hard to comment on where they will land, because frankly, I've seen about 15 different versions on pricing in the last 2 weeks.

Operator

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

Justin Funnell - Crédit Suisse AG, Research Division

Two questions please. Smartphone penetration in Europe on contract users now 50% on the numbers you've given us today. Just wondering, as we go through the remaining 50%, which I presume would be taking perhaps a bit more time, does that mean data-only growth slows down. Or can you start to get a more material data revenue growth from increasing data revenue per user? Secondly, the experience in Australia on consolidating the sort of weak fourth player, does that give you food for thought, let's say, when considering consolidation in Europe, which would be perhaps once bitten, twice shy?

Vittorio Colao

I don't think -- to the first question, I don't think that the remaining 50% will take more time. We have more and more lower-cost handsets and more and more choice across operating systems and within operating systems, with exception of Apple, with different price points. So at least for the time being, we haven't seen a real slowdown. And if you look at the U.K., where you are already at 80%, that shouldn't be the case. Now every market has its own speed. So clearly, Italy will continue and Germany will continue to go at a different speed than U.K. and the Netherlands. On the need for improving ARPU per customer, I fully agree. We have done some price increases in some markets, very small ones or at least what I consider small ones, like in the GBP 1 range or something like that. I wish that my competitors felt the same pressure and need and urgency. On Australia, I will leave the question specifically on Australia to Nick. The broader implication, are we more careful, more concerned in our due diligences on technical -- on the technical front? The answer is yes, we are, for example, doing the Cable & Wireless integration preparation in a very careful way. But at the end of the day, sometimes you find things which are different from what you thought. Nick, comments on Australia?

Nicholas Jonathan Read

Yes, I mean I think maybe I'll do 2 points. First of all, to your very specific question, I think the industrial logic was very clear, and we still believe that it was the right thing to be done in Australia, because we were subscale. I'd say we had a clear plan. I just think it was badly executed due to lack of management capabilities. So if I now look at Australia -- Steve and I were down in Australia last week, going through the plans and the operation in a bit more detail and probably given I was on the far right of Andy's chart on negative growth. Maybe it's worth just covering 4 or 5 points in Australia and what we're doing to recover the operation. So first of all, management team, as I say, needed to be strengthened. We're doing that. The capability gaps have been identified, and that will improve execution going forward. Secondly, in terms of network, there's really sort of 5 things we're doing on that. First of all with the single RAN swap, that's now 80% complete on our existing networks, so tracking to plan. Second was first phase of our 850 rollout. So we will be focusing on the metro areas at 70% complete and tracking to plan. And actually, Steve and I, we're very pleased with the level of performance of that network up European level and standards. And therefore, we're looking to further extend that 850 coverage to the outside-metro area going forward and complement that within building solutions as well. Third was around transmission, dot fiber and IP microwave. This is running behind schedule, so this is still a performance issue. It's 30% complete, and we agreed an acceleration plan with extra resource to go down there. Fourth was we announced the Optus JV, which I think strengthens our footprint going forward strategically. And then finally, we piloted, tested and now considering the speed at which we can roll out an LTE solution at 1800. Service issues are resolved, and now, it gets to the commercial challenge and the brand perception. If you look at 15% drop in service revenue year-over-year, 4% was down to mobile termination rates. 3% is down to just base erosion, so losing customers. That rate has slowed. So the base was down 5% Q1 versus 8.6% Q4. But the key central issue we have is ARPU erosion, which represented 8 percentage points, and that's predominantly postpaid handset driven. And there are really 2 issues we've got there is high-value customers are churning, and we're under-indexing on attracting high-value customers, obviously down to network perception. And then the second issue with downward migration, which is more of a phenomenon in the market generally, because there have been bigger buckets of value, and customers are becoming a little bit more price sensitive. It was interesting that Telstra actually put up pricing recently. So we have a number of commercial actions to address each of those going forward.

Operator

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

Simon Weeden - Citigroup Inc, Research Division

I've got a few short questions, I think. I wondered if you could elaborate a little bit on the growth mix in Italy, in particular whether or not the MVNOs are still giving you positive contribution on the mobile side, and therefore, we should draw the conclusion that the retail business is shrinking more quickly than the top line numbers suggest. Second, on Spain, whether you think the revised commercial model for acquisition will survive if Orange doesn't replicate it. Is there a compromise being found in the market there? Or is that just something that's probably not sustainable unless they change their policies? And then finally, on the stock buyback, given your -- the relative imminence at the end of the current allocation, should we take it from the fact you haven't announced the extension today that there is no intention to do so and so the stock buyback will complete probably during August, and that will bring it to a halt?

Vittorio Colao

Yes, let me -- Simon, let me take the Spanish question and pass the Italian one to Michel and the buyback to Andy. The Spain situation is a little bit more complicated than what you said. It's not just about Orange. If you look at the recent market data, okay, we and Telefónica took out subsidies from acquisitions. We put it into retention. Orange didn't fully play ball for reasons that we all understand. But they reduced -- they were a little bit more disciplined in things. But the real reason why I'm only half happy with Spain is because a combination of Orange and low price from MVNOs is contracting our acquisition growth and our market share. So it's not just Orange, to be honest. It's Orange and also the MVNO role. I think in -- more in general, in Europe, the operator should think and we should think more carefully about MVNOs. Clearly, we will have to do something, and we are planning to do something. We have put more promotional effort now into the market. We have doubled, I think Michel, the quantity that comes with the promotion in Spain, and we will have to do something. It's not just Orange though. It's not as simplistic as it looks. Orange is part of the issue but not the whole thing. So going in the right direction but not fully happy with where we are today. Michel, Spain -- Italy?

Michel Combes

Italy. So in Italy, that's not really an MVNO question. Fortunately, we are not, as in Spain, facing this type of threat. I would take 3 buckets in Italy. Fixed, we have a kind of managed slowdown in our performance. When I say managed, meaning focused on profitability, so less gross adds in bitstream areas, because there's a profitability of this resale type of activity is not as good as we would expect. So we'd prefer to focus on unbundling. And when I turn to mobile, enterprise under pressure, mainly macroeconomic situation, crisis, which translates in usage deterioration and slowdown or let's say increase of disconnections. And consumer, which is again a little bit of macro and also renewed competition from some of our peers, which are more focused on volume, we have decided in the past quarters to be more focused on value and on our base management. Of course, we monitor the situation in Italy very carefully, and if needed, we'll have to regain a little bit of traction on customer acquisitions if the market remains acquisition driven.

Andrew N. Halford

And Simon, on your buyback question, I think the simple answer to your question is probably yes. The current program will run its course within weeks, so probably in August. Clearly, the debt level on the balance sheet at the end of last quarter is pretty low by our standards and probably by sector standards, albeit we will shortly have to close of cable and wireless and then the Telstra deal. So that will sort of, combined, put GBP 1.5 billion on there. But I think at the moment, our view is that we should just remain with a reasonable degree of caution on the balance sheet. The dividend commitment this year, obviously, is for this year, and I think the point, we will look at the 2 collectively. So simple answer, this buyback program will run its course in August and no intent at this point in time to replace it with something else.

Operator

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

Akhil Dattani - JP Morgan Chase & Co, Research Division

Just 2 questions, please. Firstly, on pricing. If we look at the global telco space, we've seen a few interesting pricing moves over the last few months in quite a few markets. So for example, in Switzerland, we've seen Swisscom starting to introduce speed-based pricing, and in the U.S., we've got share data plans being introduced. So I just wondered what your view was on those developments and if we should expect any sort of similar moves from yourselves over the coming months. And then the second question was just on your dividend. When you announced the dividend with your full year results, you provided some FX sensitivities around that. And given the sterling-euro rate is at EUR 1.28 now, I just wondered if you can maybe flesh that out and provide a little bit more color on how you're thinking about that.

Vittorio Colao

Yes, Akhil. Let me pass the question on dividend to Andy, and I will take the pricing one. First of all, I'm sure you don't expect me to announce our pricing intentions in a worldwide conference call like this one, so I would not comment on what we are going to do. I would comment on the 2 examples that you have made. Intellectually, as an industry observer, I like both of them. I tend to believe that for customers, the Verizon, how do you say, setup or proposition is probably easier to understand. We have tried ourself speed-based pricing, and we still have it in some markets. Michel, right? To be honest, I don't want to look arrogant, but the speed of the network is becoming so good that nobody really understands what's the difference of experience when you have a smartphone, which works at 28 or at 14. I mean, you basically still watch the same video. So it's much more, I think, about freedom of usage, about delay or -- how do you call it, the bing thing -- latency and the immediacy of response rather than absolute speed. Having said that, there are segments of the market where absolute speed still can have a premium. For sure, if you are a corporate account or a business and you want to whatever, download files, speed does make a difference. But keep in mind that we are now getting at speed levels or maximum speed levels that start being difficult to be perceived by the customers. Both of them, in general, positive, because they are value accretive, both moves.

Andrew N. Halford

And Akhil, on the dividend issue. I mean, clearly, when we set out that 3-year policy, we -- with the euro cash inflow and the sterling outflow, we were keen to put some sort of cap and cover on it just so that we weren't exposed as things changed massively. And in any way, we've gone, what, 2.25 years into the 3 before, actually, we've got anywhere close to that. So it's withstood the test of time reasonably so far. I think we're just going to have to see what happens over the balance of the year certainly our minds are not on having to change the commitment of this year if we can avoid it. So we'll just monitor it and see what happens over the balance of this year.

Operator

Our next question is from Stephen Howard at HSBC.

Stephen Howard - HSBC, Research Division

I've got sort of 3 areas of questions. Firstly, just following on the issue of Australia. I wonder if you could just roughly quantify for me what the remedial CapEx has been that's gone into fixing the network issues there. Secondly, following on from the last question, yes, obviously, Vittorio, I didn't expect you to broadcast intentions. But I do think that the Verizon Wireless share-everything sort of concepts looks really interesting. Can I just ask you maybe to sort of outline, I guess, how you think you can better capture the upside that really ought to be there in the tablet space but which, if we look at sales of iPad so far and the mix between WiFi and cellular enabled, it seems rather to have eluded the industry? And then a follow-on from that, you mentioned again the success of the test drive proposition here in the U.K. I was wondering if that had been extended to any other markets. And if not, why not?

Vittorio Colao

Yes. Why don't I take the pricing and the test drive thing, and I let Steve Pusey and Nick Read scratch their head on the CapEx question on Australia in the meantime. Let me say, Stephen, I totally agree with you. There is a great potential. We have been talking about monetization of data. There is a great potential of better exploitment of the fantastic data capabilities, especially in the video area, that has something to do with devices and technology, so iPads, tablets, better smartphones, larger-screen smartphones and so on, higher speed for the smartphones as long as they are at least at, whatever, 14.4 but also with pricing. So without, again, making any comment on what we are going to do -- and to be honest, it's difficult to compare exactly the U.S. to Europe. It's clear to us that how to liberate usage, especially video, is very important. And if you see a future of tablets, not just the iPad but now, there's the Samsung one, which is very good, and there's others that are coming, ZT1 that we have and so on, enabling video on a variety of devices that we all carry with us I think is going to be a priority for us. I don't believe, I said it many times, that we need to get involved into content ourselves, but we need probably to help distribute the content ourself. And pricing, experience and network management is very important. I want to stress this, because that's where -- when people ask about quality differentiation, also in relation to the previous question, I don't think that when I watched yesterday the Tour de France on my iPad, I was really aware of what the speed was. What I was aware is performance is good. It's uninterrupted. It's live streamed from Sky. It's a great -- or from whatever it was, and it's a great experience. Now the next thing is how do I enable the whole family to get that great experience. And how do I enable the network to manage the whole family in that type of good quality from a delivery point of view? So more than speed, back to my question, it's about liberating the usage and ensuring a good experience. Australia, guys.

Nicholas Jonathan Read

So the question of capital invested in Australia. Last year, we -- which was really the start of the remedial action, so in other words, the uplift of the capital expenditure, we were around the sort of mid-20s in terms of the capital intensity. This fiscal year, we're going to be above GBP 20 million again. I would expect next year to be maybe around the same but starting to head down from that point.

Operator

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

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

I just got one question on capital efficiency. Ofcom presented to telecom owners recently and presented a view that macro sites might have an increased capacity by around 10% from here. And they sort of indicated that spectrum was clearly the main multiplier for capacity expansion. Should we be thinking about sort of CapEx

[Audio Gap]

expectation. But countering that, would you see inflation in spectrum cost as we move forward to the next spectrum cycle?

Stephen Charles Pusey

Steve here. I haven't seen the specifics of the Ofcom dialogue with yourself. But generally, there will be a shift. I'm not sure how they present it is -- I'd agree with. What will happen is with 800 and 700 in some countries spectrum and 850 in others of our order spectrum, and I just want to build less macro sites to get coverage. You still require density and capacity, which can be served either in spectrum or in CapEx. But there will be a move to small cells, which will take up your inner city capacity, and the CapEx will shift towards those areas. So I don't see that necessarily being the cases as they presented it to you. It remains the same in the formula of the trade-offs of spectrum versus CapEx choices to serve capacity. Less macro sites perhaps, because we're -- once you've covered a country, you've covered it, but the density of population and usage will require capacity over time. And we'll serve that either in spectrum or in more CapEx, and those are choices on economics of one versus the other.

Operator

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

Paul Marsch - Berenberg Bank, Research Division

It seems to me that there's been quite a material reduction in transparency across the whole of the telecom sector, in terms of visibility on numbers, transparency of numbers from the way that companies report, and I'm sure that's not good for valuations in the sector. I think treatment of handset subsidies is one of the culprits in the mobile space. So I'm wondering if you can tell us what percentage of service revenues today relate to the recovery of handset subsidies, and how that's changed over maybe the last 1 or 3 years. And that's my first question. Second question is you've obviously made a few comments about the handset subsidy situation in Spain. Are you still committed to the changes to the handset subsidy policy that you've made in Spain? Or is a reversal of that policy an option that could be under consideration?

Andrew N. Halford

Should I take this? Paul, I don't know whether your comment is specific to us or generally about the sector. I mean, we publish a huge amount of information, I think, on our business by operating business, by cost, by category. And if there is something I'm missing out, then we're very happy to hear about it, but I honestly think there's a huge amount of information there. Specifically to your question of subsidy, I mean for the group, as a whole, we probably spend about 14% of our revenues on acquisition and retention of customers, slightly higher in Europe, slightly lower in AMAP that has been generally on a slightly increasing trend over the last 2 to 3 years, particularly as smartphones have come in and because we bear the cost upfront but then get the revenue uplift later on. That does have the effect of increasing that percentage slightly, albeit that is something we're now working very hard, because we have now got extra revenue in the base. And hence, one of the things we're seeking to do is to flatten that off to decrease it as we can do, but that also is equally subject to market forces and what our competitors are doing. But overall, to your transparency point, I'm slightly surprised. I think we provide a huge amount of information.

Paul Marsch - Berenberg Bank, Research Division

No, it was a -- it's a comment more generally about the sector. And I think you see it in the way that companies are converging information about the cost base when fixed and mobile are getting together, for example, on CapEx on fixed and mobile. And I think the handset subsidy issues is one that maybe the mobile segment needs to address.

Vittorio Colao

Yes, the convergence of fixed and mobile assets and the lack of transparency there is probably not for this conference call and not for Vodafone probably.

Paul Marsch - Berenberg Bank, Research Division

And the situation in Spain?

Vittorio Colao

Let me get to the Spanish thing. The -- it's not an issue of commitment or noncommitment. The issue is very simple. We are committed to delivering the best possible absolute EBITDA and cash flow. I said from the beginning, and I think Vodafone immediately took a very clear position on if it's possible to -- at the end of the day, the point is not eliminating subsidy. The point is reducing the weight of commercial cost on revenues and improving margins. Whatever combination of these 2 things is feasible for us is the best. So it's not about commitment. It's about we have followed -- we have reduced -- we have taken away subsidies from acquisitions. We are competing harder now, as I said, not just with Orange but also with MVNOs. We have to take whatever action delivers the best result at the bottom line. So we are not, again, ideological on a formula or a percentage or anything. It's just about what delivers more.

Operator

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

Jeremy A. Dellis - Jefferies & Company, Inc., Research Division

I've got 2 questions, please. Firstly, on your margin guidance. In May, you talked about the margin stabilizing during the FY '14 year, and you envisaged falling commercial costs being an aspect of that. I suppose given the uptick in competitive pressures we see today, are you still as confident that commercial costs can be brought down? Are there other areas of cost-cutting opportunity that you might want to sort of highlight perhaps a little bit more now? And then just in terms of full year guidance, I guess you've confirmed the free cash flow guidance of GBP 5.3 billion to GBP 5.8 billion. I think consensus is at about GBP 5.3 billion now. Consensus probably needs to take off another couple of hundred million for FX. Consensus also has stable margins, and you've told us that maybe the revenue environment is worsening from the second quarter. So I just wondered how you feel comfortable reiterating so firmly the free cash flow guidance and then what there may be out there that maybe we're missing perhaps on the CapEx side or in terms of rebounds later in the year.

Vittorio Colao

Let me take the first part of the question, and Andy will take the second. We -- as I said, we are not ideologic on which kind of cost is good or which kind of cost is bad. Of course, we are looking, as always, at cost-efficiency programs that will deliver cash, which means more cross-country or cross-market sharing of platforms, which means higher exploitment or heavier exploitment of our offshore operations, which are lower cost than the onshore ones, to serve Europe, which means concentration and standardization of suppliers on the technology front, some of it with the support of Verizon and doing things together with them in order to reduce unit cost. And in general, a very serious look at our cost in support functions throughout the group, both at center and in the operating companies, are elements of this cost thing. So commercial cost, definitely there, but not the only one thing that we want to action. Andy, on the...

Andrew N. Halford

Yes, the free cash flow guidance. I mean the difficulty for me to comment on the comparison with consensus is just what level of granularity people have got externally on the various moving parts of the free cash flow. And there are a number of things there in terms of the CapEx, in terms of tax payments, in terms of interest cost, in terms of working capital movement that I think are quite difficult to form views on with great precision from an external perspective. So when we went into the year, we formed our own views on what we thought was the generality of the likely progression on the revenue trends. We are working the costs harder, because as you say, the margin pressures certainly continue, and we are going to have to take sort of the cost out elsewhere to make sure that we are heading towards that stability ambition of the end of the '13, '14 year. But overall, we -- as we said, we think we can still be in that range that we gave out earlier in the year on the free cash flow for the full year.

Operator

[Operator Instructions] And while waiting for the questions, we'll go on to Darren Ward of Echelon Research.

Darren Ward - Echelon Research & Advisory LLP

Vittorio, you've been busy, obviously, very busy recently with network share deals and a couple of acquisitions. Just looking at those very broadly, it seems that outside the eurozone, you've been making acquisitions, and inside the eurozone, you've been doing the sharing deals. Do you have some sort of caution or aversion to making acquisitions inside the eurozone at the moment? Or is it still a question of opportunity and price? And just as a follow-up, slightly more specific question to that, just looking at Spain and the talk that Yoigo is for sale, just do you see anything in the active network share deal you already have in Spain or in the regulatory antitrust perspective that would absolutely rule that out?

Vittorio Colao

No, there's no eurozone negative bias. Of course, there is -- there are eurozone considerations relative to country risk and to other things. But you have that type of considerations in every country of the world, so you really have to assess things in a country-by-country way. I understand that Cable & Wireless is called worldwide, but it's still a British company, and it's in Europe. So it's not necessarily an out-of-Europe thing. The position is always the same. We look at everything in every market that either improves our cost position or increases our capabilities in serving communication needs of the customers, and we look at those things as the main criteria for evaluating a deal. As I said, network sharing, at the end of the day, is one of the ways of reducing our cost when a consolidation play is not available. Specifically, on Spain, of course, Yoigo if it comes up, we will have a look. We'll have to compare the advantages from Yoigo -- from a possible Yoigo acquisition to the cost of it and the alternative commercial investment that we can put and then see whether it makes sense or not. But as I said, we always look constantly at everything in the market where we operate, because everything that can reduce cost or improve capabilities is our duty to -- it is our duty to assess.

Operator

We now go on to Ottavio Adorisio of Société Générale.

Ottavio Adorisio - Societe Generale Cross Asset Research

A couple of questions. The first is on incoming and MTRs. Look at your charts, especially on revenue breakdown, the pie chart on Page 9, you disclosed that consumer contract incoming revenues are 5% of all European revenues. And Slide 4, you basically said that the 160 basis points fall in service revenue in Europe was all driven by the fall in MTRs. However, when I look at the revenue breakdown last year, you also disclosed that incoming was still 5% of revenues. So given what you said on MTR, I guess that the percentage of income, it would have decreased significantly. So could you explain why that was not the case? And the second one is just a follow-up from a previous question on India, in particular on the spectrum. In a recent submission to the regulator, you basically estimated that it will cost Vodafone GBP 1.1 billion to replace your 900 megahertz with 1800 as is the request by the policy in that country. Would you still stand by that estimate?

Vittorio Colao

Why don't we start with India, and we ask Nick to give a comment to that question.

Nicholas Jonathan Read

Yes. I mean, the only number I think that we have ever quoted was to renew all of our existing 900 and 1800. On the TRAI, recommended spectrum charge in set some time ago that everyone is disputing currently, would be GBP 5 billion, yes? So that's -- is the only number, yes, on a theoretical basis. But basically, since then, 50 other formulas have been proposed, all of which could have dramatic effects. So at this point in time, I think it's just a speculative number, and we wait and see.

Andrew N. Halford

And on your first question, I mean, it's slightly more sort of complex. I mean, for the group, as a whole, about 8% of our revenues is sort of coming from incoming. In Europe, you can see that the elements of that -- this consumer contract is about 5% of the revenues. For the previous year, the net impact of MTRs was about 2.25% for the group. And we've said something similar is what we expect for the group this year, albeit the first quarter at 1.7% is clearly below that average and why -- hence, why I said earlier that we'll pick up more of an impact from MTRs in the balance of the year.

Ottavio Adorisio - Societe Generale Cross Asset Research

Sorry, the 5 billion is pounds, just [indiscernible], the other -- the first question.

Andrew N. Halford

It's 5%.

Vittorio Colao

5%.

Andrew N. Halford

5%.

Ottavio Adorisio - Societe Generale Cross Asset Research

No, no, no, on the other question.

Andrew N. Halford

Sorry, I missed what...

Vittorio Colao

Pounds.

Andrew N. Halford

Yes, pounds. Yes.

Operator

Our next question comes from Antoine Pradayrol from Exane BNP Paribas.

Antoine Pradayrol - Exane BNP Paribas, Research Division

Two quick questions on SMS revenues. I see that probably, for the first time, your SMS revenues are down organically in Q1, minus 1.2%. Can you just explain what has changed? What are the drivers of the change in estimate revenue trend compared to the previous quarter, which was up 2.4%? And also, is it declining for good? I mean, is it -- could we expect that to return to growth in the coming quarters? Or is the decline here to stay?

Vittorio Colao

I think Michel can comment more, but it's a mixed situation, the SMS one. I mean, I try to go by memory. In some countries where we have bundled in an aggressive way, the mix of what goes up and what goes down becomes less significant, because you have infinite or unlimited messages, and it's part of the packaging. In other countries where we have not bundled, I have Spain in mind, there is a real decline. In general, the volume is up 4%. If you want my long-term vision for Europe, we will not -- as I said several times, we will not be talking about SMS revenues, data revenue, voice revenues, but we'll talk about ARPU. And we are not there yet, because the different European countries are in different stages. But for example, for the U.K., I already have a hard time having a dialogue with my colleagues on individual lines, because the more you bundle, the less the individual line is really representative of what customers choose. Michel, you have...

Michel Combes

Just what -- the main change in between the 2 quarters is Italy. So we were already going down quite significantly in Italy and Spain, and we have explained the reason there and how we are offsetting it through integrated bundle that we have pushed in those 2 markets. In Italy, that's slightly different. That's not a substitution as we have seen in other countries. That's more macro driven and usage driven.

Operator

Our next question is from Nick Lyall at UBS.

Nick Lyall - UBS Investment Bank, Research Division

Just to ask 2 questions, please. There's a few comments on the tightening of U.S. tax regions, particularly on dividend. So just really to ask Andy first if there were -- have there been any concerns or discussions about extra tax arrangements required on the partnership agreement with Verizon for the Verizon Wireless partnership, please? And then secondly, back on Paul's question on Spain with commercial costs. I mean, I understand you're saying you're not pulling fully back on changes to SAC. But is this a material change from what you imagined from the start of the year in the Spanish EBITDA number, please?

Andrew N. Halford

So I'll take the Verizon Wireless one. The simple answer is no change. Most of the discussion I think is taking place in the U.S. at the moment. It's more about the opposite issue of how to get cash that is offshore from the U.S. back into the U.S, whereas obviously, we have the alternate of the cash being generated in Verizon Wireless, which continues to accumulate. The net debt is now back down to only $2 billion even after the $10 billion distribution earlier this year. There is nothing that we are aware of that is likely to change our ability to continue to get that dividend out. That dividend is received by us with no further tax to pay, because it is out of already tax income in the U.S. So the simple answer is we don't see anything changing on that front.

Vittorio Colao

Yes. On Spain again, is it different than what we thought? I mean, nobody thought that Spain magically would see an -- a big increase in margins and everybody would happily go into the same space. I think it's taking the time that we thought. I'm more focused on the outcome, to be honest, rather than how long it takes. So that's why we are -- as Michel said before, we are looking at what we can do in order to be more competitive with Orange and the MVNOs and to make their life less easy. And then we'll see whether the sector evolves back into what it was or into a better space. That's a little bit what we are doing. To be honest, we are ready to put down the money that is necessary. And then also, my caution in the earlier answer on the Yoigo thing, because I don't know. I mean, I looked at their results, and I see that despite everything, they're -- they are slowing down quite a bit. So maybe the whole sector will go in the right direction, maybe not.

Operator

Our final question of today is from the line of Maurice Patrick from Barclays.

Maurice Patrick - Barclays Capital, Research Division

A couple of quick questions on enterprise and the relative visibility of enterprise against consumer. It slowed in the quarter. Curious as to know the element of sort of similar drivers with enterprise in terms of how much is volume based, perhaps fixed cost, fixed pricing and how you see visibility compared to the consumer segment. And then on future growth in enterprise, you've made a couple of acquisitions, of course. Which are the markets do you see either with huge growth potential or perhaps areas where you're lacking in the infrastructure to make that move?

Vittorio Colao

Yes. I'll give half of the answer. Michel can give the other half. The half of the answer is enterprise is doing well in the high end, Vodafone Global Enterprise, because we have a pretty unique not really offer but setup. I think we are the only ones who can really deliver the 7%, 8% growth out of truly international services. It's overall basically not growing because of pressure in the SME segment, especially in Europe, where we see lower volumes and lower activations, lower number of SIMs, as I said, as a result of the situation. I am very optimistic about enterprise, because I see the evolution of technology and the evolution of services going in our direction. It's really more and more of what we have been doing, which is smart convergence at the unified communication level without old legacy cost. Now of course, we will need some piece of infrastructure here and there and some platforms here and there, which is why we are making acquisitions. But it's a very -- a more capital-efficient way to serve unified communications in the enterprise space that is very consistent with what we are, with our set assets and D&A. So I'm optimistic save for the obvious impact of the economy in Southern Europe and in general, on the economy. Michel?

Michel Combes

Yes. So just to [indiscernible], slight slowdown in this quarter compared to the previous quarters, a quarter mainly driven by mobile in Southern Europe and mainly Italy and Spain. But Italy is probably the new piece this quarter, usage and disconnection. So clearly, macro economy, a little bit of competition price but mainly usage and disconnection. The good piece is -- obviously is a fixed side of the story and our One Net story, 2.2 million seats now, so growing quite nicely with uplift in terms of ARPU and reduction in terms of churn. So I guess that's our strategy, which is to try to gain traction in this unified communication space and integrated fixed and mobile in the enterprise that deliver what we were expecting to deliver.

Operator

Okay. As that was the final question, can I please hand back the yourself, Vittorio, to close the call?

Vittorio Colao

Thank you, operator. Thank you, all. As a closure, again, a couple of messages. One, the usual geographic spread and coverage that makes me feel good about the type of presence that we have, difficulties going ahead in Europe. Still good performance in emerging markets, and in Verizon Wireless, pretty good performance and very good cash generation, which for reasons that you all understand, make me feel good about the future.

Continuous hard work on future proofing our revenues and powering up our networks, both the LTE and HSPA+, with a view of leverage on the video experience and the smartphone/tablet experience, which we all understand is very compelling. And again, focus on cost and focus on delivering the margin in order to continue to be in line with our guidance and our long-term remuneration objectives.

Thank you for your questions. Thanks you for your attention and looking forward to seeing you later in the year. Thank you, operator.

Operator

Thank you. This now concludes our call. Thank you all very much for attending. You may now disconnect your lines.

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