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Vodafone Group plc

Interim Management Statement 25 July 2014

Information in the following communication relating to the price at which relevant investments have been bought or sold in the past or the yield on such investments cannot be relied upon as a guide to the future performance of such investments. This presentation does not constitute an offering of securities or otherwise constitute an invitation or inducement to any person to underwrite, subscribe for or otherwise acquire or dispose of securities in any company within the Group.

The communication contains forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 which are subject to risks and uncertainties because they relate to future events. These forward-looking statements include, without limitation, statements in relation to the Group’s financial outlook and future performance. Some of the factors which may cause actual results to differ from these forward-looking statements can be found by referring to the information contained under the headings “Forward-looking statements” and “Principal risk factors and uncertainties” in our annual report for the year ended 31 March 2014, both of which can be found on the Group’s website (www.vodafone.com/investor).

The communication also contains non-GAAP financial information which the Group’s management believes is valuable in understanding the performance of the Group or the Group’s businesses. However, non-GAAP information is not uniformly defined by all companies and therefore it may not be comparable with similarly titled measures disclosed by other companies, including those in the Group’s industry. Although these measures are important in the assessment and management of the business, they should not be viewed in isolation or as replacements for, but rather as complementary to, the comparable GAAP measures.

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Vodafone Group Plc Q1 2014-15 Interim Management Statement

25 July 2014 1

Operational Review

Vittorio Colao

Chief Executive Officer, Vodafone Group plc

Good morning, everybody. Welcome to our interim management statement for the first quarter of 2014/15. I will take you through the highlights and update you on our strategic and commercial developments and our views on the current regulatory environment, and Nick will update you on our financial performance and take you through the trends in our six key markets. He will also provide some country-by-country detail on the progress of Spring. I will then close and move to Q&A, for which Nick and I will be joined by Philipp and Steve, who are here with us.

So I will start with slide 4, highlights for the quarter. Group organic service revenue was down 4.2% compared to 4% in the previous quarter; excluding mobile termination rates it was down 2.9% in Q1. We continue to see strong growth in our emerging markets, driven by continued customer growth and data usage. Growth in AMAP was 4.7%, or 6.2% excluding MTRs. This growth rate was, as expected, slightly down on the previous period, due to the lapping of prior year prices rise in India and the impact of MTRs in South Africa.

In Europe, conditions remain challenging due to continued competitive and regulatory pressure. As a result, service revenue fell 7.9% year on year. However, we are beginning to see encouraging signs of stabilisation quarter on quarter, due to our commercial actions on Red and 4G and investment in the network. Our actions are attracting a higher quality of customers. We now have 6.7 million customers with 4G and 14 million with Red. Our 4G and Red plans continue to drive strong data usage. Data traffic growth accelerated to 73% year on year across the Group and 53% in Europe.

Project Spring: our Project Spring programme is gaining speed. Our European 4G coverage increased to 52%. This is up 20 percentage points since September. Our network performance is also improving. In the last nine months, we have reduced dropped calls in Europe by 1.2 million per day. In this quarter, we have made further progress also in our Unified Communications strategy across Europe. Integration of Kabel Deutschland has begun, and is on track. We have announced fibre alliances in Ireland and in Portugal this week, and just this week we made also two further steps: the completion of the acquisition of Ono and the revised agreement with Orange to co-build fibre and give them access to 1 million homes from Ono. Finally, we have made some smaller moves on the M&A front, including the planned purchase of Cobra, a leading machine-to-machine provider, to enhance our capabilities in this space, and we sold our business in Fiji. Free-cash outflow was £0.6 billion in the quarter. This is £1.5 billion lower than last year, due to the phasing of capex spend associated with Spring. Net debt at the end of the quarter was £14.1 billion.

So Nick will be talking later about the performance of each of the main countries in more detail. I would like now to give you an overview of the broader business. The chart on page 5 shows revenue service growth, excluding termination rates, with AMAP countries in blue and Europe countries in red. As you can see, AMAP is strong and growing, with service revenue up 6.2%. Our high-quality network and customer service continues to attract customers, with the base up 10% in the year driving usage. The number of data users increased by 31% to over 100 million, and data traffic more than doubled. Although not on this slide, I also want to talk about M-PESA. M-PESA remains a key success story for us. The base is now 18 million, up 1 million in the quarter. This slide also shows that revenue continues to decline, 6.6% in Europe. However, we are seeing some mobile ARPU stabilisation, and we are also delivering better churn rates in consumer contract, around one percentage point better year on year. What this slide does not show is that we are seeing quarter-on-quarter stabilisation in absolute revenue in a number of key markets in Europe, such as Italy and Germany.

I’d like now to turn to progress against several key initiatives: Spring, 4G and unified communications, in that order. So slide 6, we have made good progress on our Project Spring programme, and, in overall terms, we are around a quarter of the way through the programme. Within the 6,000 new 4G base stations, 4,700 were in Europe in the period. Therefore, our European 4G coverage increased to 52%, as I mentioned a while ago, compared to 46% last quarter and 32% when we started the programme, so we are well on our way to our 91% target by March 2016.


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In India, where we aim to have 95% 3G outdoor coverage in targeted urban areas over the next three years, we have taken the 3G coverage on this footprint to 89%, with around 2,300 sites added in the quarter. In South Africa, we added around 470 4G sites and 290 3G sites in the last three months only. 70% of our sites in South Africa are now connected to high-capacity backhaul, and we expect to complete our radio access networks renewal programme in the next quarter. We continue to build a more robust network, with more Single RAN and high capacity backhaul. Today, in Europe, 72% of our sites have high capacity backhaul, and 22% have fibre. Single RAN is in 68% of our sites, and, finally, in terms of fibre to the home, we have increased this by 1 million households passed since last September.

So we are now on slide 7, 4G. We have put together a number of charts here, showing clear evidence of good progress. Starting from the top left, we have increased our 4G customer base, the red bars, to around 7 million, as I said earlier, these are active customers, with both a 4G device and a 4G plan. The opportunity to upsell is clear, as 7 million out of the 14 million who have a device do not have a 4G plan yet. You will see within the trend that the proportion of those who have a device that also have a plan is increasing as well, to 49%, compared to 36% in Q3 last year.

Moving to the top right, we are delivering a better network experience. As I said, our 4G network now covers 52% of the population. We are supporting the 4G rollout with a targeted local communications strategy focusing on network benefits and differentiation rather than price. Bottom left, we see there the trend to use more data continues. Data usage in Europe is not just growing, it is also accelerating; with growth of 42% last quarter and 53% in this quarter. This growth is evident in all our main markets in Europe. This traffic is driven by more smartphones where penetration of the base increased seven percentage points, now at 47% in Europe. As half of the base still doesn’t have a smartphone, there is clearly a lot of growth left.

Now, there is also more usage per smartphone, as it is now 530MB in Europe. This is up 100MB on the level of just six months ago. Also, 4G usage is still around twice the level of 3G; in some countries where we have attractive content, such as UK, the ratio becomes three times. As a result of this strong demand, 4G now accounts to 19% of data traffic on our European network, up one percentage point on Q4. This is why we are pushing content combined with 4G. We have now launched content in eight markets, seven in Europe. We aim for the most relevant partners in each market. During the quarter, we added a full content bundle of music and film in Spain from Canal+ and Napster, as a part of the Red tariff plan. In Italy, we launched music and video services with Infinity and Spotify. And in UK, we launched Netflix on 1 July for Red customers, adding this to the existing content choices that you are aware of of Spotify and Sky Sports. We aim to add more content deals in more markets over the coming weeks and months.

So third area of strategy, unified communications, this is page 8. This is an area where we have significant progress during the quarter. Taking the right-hand side of the slide first, we continue with momentum on fixed broadband net additons, with some 119,000 across the Group, of which 170,000 were in Europe. This represents the third consecutive quarter of strong growth. We now have 9.4 million fixed broadband users, including 2.3 million from KDG. Our total customer base increases to around 11 million after the acquisition of Ono. Vodafone today is one of the largest providers of fixed broadband services in Europe. Fixed now represents 23% of service revenues and 24% of enterprise revenue. Fixed revenue continues to be under pressure, due to price competition in many markets, but we are seeing overall revenue growth.

Now, looking at the progress in deploying the services in the various markets. In Germany the integration of KDG is now underway, creating a full integrated operator, covering 12 million homes or 29% of the population. In addition, we have also the attractive wholesale offer from DT, which covers 40% of the population. In May, we commenced the cross-selling of service to around 600 Vodafone stores and 200 KDG stores under a joint “Zuhause” brand.

In Italy, our self-build fibre roll-out is progressing and we expect to reach our 6.4 million target by 2016. This complements a wholesale deal with the incumbent, which has an addressable base of 2.2 million. The recent Ono acquisition will allow us to establish a strong platform in Spain, as that asset already covers 41% of the households. As I mentioned we have agreed new terms with Orange to target 2 million homes in total, while providing Orange with a wholesale access to 1 million homes passed by Ono.

You may be aware that we also announced, a couple of weeks ago joint fibre deployment plans in Ireland. In Portugal we have agreed a reciprocal deal with the incumbent, covering 900,000 homes from December 2014, 450,000 each. This further accelerates our build programme, so in Portugal now we are targeting 2 million homes passed compared to the original target of 1.5 million with Spring.


25 July 2014 3

With all the agreements and our self-build programmes we are now creating a strong position across Europe. Looking at the left-hand side, which shows our coverage today, we already have NGN access to potentially around 40 million homes in Europe. Going forward our existing self-build plans will increase the number of homes passed by a further 5 million over the next couple of years.

Then, on slide 9, my views on the regulatory environment in Europe. As I said six months ago, the situation is improving, albeit not as much as it would be possible and in my view desirable. Consolidation is indeed happening, as we see in Germany and in Ireland. I would say that the remedies imposed on known infrastructure based operators are a little bit inconsistent with the need to invest in coverage and services in Europe, but consolidation is anyhow a good thing. Roaming regulation will need to be detailed. For Vodafone, this is less and less of an issue and we succeed with our ‘take your home tariff aboard option’. We have today 15 million users of this service, and we just extended it beyond Europe to a number of countries, including, very importantly, the US, India, Australia and New Zealand. So my priorities for the year continue to be the implementation of harmonised spectrum rules, net neutrality regulation and then roaming and the Connected Continent. In summary, regulation in Europe is moving in the right direction. It could be a little bit more decisive in supporting our sector’s recovery. Nick, I would turn to you for the details.


25 July 2014 4

Financial Review

Nick Read

Chief Financial Officer, Vodafone Group plc

Thank you, Vittorio. Good morning, everybody. I’ll start on slide 11 by giving you an overview of the Group performance, but before getting into the detail I’d like to point out that the slide includes Italy at 100% for all periods, which is the statutory basis moving forward. I’d also like to add that we have included Cable & Wireless in Q1 of this year but not restated Q4 in the organic growth rate. If we were to restate Q4 to include Cable & Wireless, the Group service revenue growth rate would be down 4.1%, and Europe down 8.4%. Group service revenue in the quarter was £9.4 billion, which was down 4.2% year on year. If you removed the mobile termination rate impact, it was down 2.9%, which is stable on Q4 performance. In Europe, service revenue declined by 7.9%, reflecting continued competitive and regulatory pressures. However, we are seeing evidence of commercial execution in a number of markets, particularly in terms of stabilising ARPU and improving in churn rates for consumer contract.

The momentum in mobile contracts and fixed customer additions in the second half of last year has continued into Q1. AMAP continues to grow strongly at 4.7%, driven by good customer growth and strong data usage, with active data customers up 31%. The pace of growth slowed, as expected, due to lapping of price increases in India and the 50% MTR cuts in South Africa.

Turning to revenue by service. Mobile in-bundle revenue increased 4.7%. This growth was driven by our Vodafone Red plans, which are now used by 14.3 million customers, up 2.3 million in the quarter. We now have 61% of European mobile revenue in-bundle, a rise of five percentage points year on year. Enterprise service revenue fell 2.9%, which reflects ongoing ARPU pressure in domestic segments. However, Vodafone Global Enterprise revenue increased by approximately 2%, and machine-to-machine up 31%. These two areas represent around a quarter of enterprise revenue. Fixed service revenue increased 0.1%, following a 1.8% decline in Q4, reflecting the strong broadband net additions in the second half of last year and continued growth in Q1. Other service revenue continues to be impacted by the conclusion of several MVNO deals.

Capex was 1.9 billion in the quarter, which is around £850 million ahead of last year’s spend due to accelerated network deployment as part of Project Spring. This takes the ratio of capex to sales to 18%, compared to 11% a year ago. We had a free cash outflow of £0.6 billion in the quarter, compared to a £0.9 billion inflow last year. The movement mainly reflects the significant increase in capex in the quarter, along with the start of the Project Spring capex ramp up in Q4 last year, which affected working capital this quarter.

Net debt at the end of the quarter was £14.1 billion, an increase of £400 million from March. I know that some of you include the $5 billion worth of Verizon loan notes in your net debt calculation, so on this basis net debt would be £11 billion. Net debt will be £5.7 billion higher after the Ono transaction completes at the end of this month.

Before I move onto the country detail, it is worth adding that our view on the EBITDA outlook remains unchanged. We expect the organic decline excluding KDG and Ono in half one of this year to be quite sharp. This reflects the year on year revenue performance, Project Spring opex and the continued higher commercial cost as seen in half two last year. However, in half two this year we will be lapping the increase in commercial spend and should be seeing an improving revenue trend helping to drive a smaller decline in organic EBITDA year on year.

Let me now turn to the individual key countries in order of size. Moving onto page 12, Vittorio has already taken you through the high-level picture on Spring. We gave a commitment to provide details of our progress in each of our main markets, and this is the first time the KPIs are included. I will limit my comments on Spring progress on each market, as I think the data speaks for itself. Bottom line: deployment progresses at pace.


25 July 2014 5

Turning to Germany. Service revenue declined 4.9%, which is a one percentage point improvement on Q4. This reflects a stabilisation of contract ARPU quarter on quarter, which can be seen in the bottom right table. We continue to see growth in the contract customer base, albeit slightly down on the strong performance in the second half of last year. The reported number you will see is broadly flat, but this was due to a non-revenue impacting base clean-up of 61,000, so the underlying growth was 65,000.

In the consumer prepaid and enterprise segments, we continue to see significant pressure from price competition creating continued downward pressure on ARPU. However, our operational performance continues to improve on many fronts. We now have 3.4 million customers using our Vodafone Red plans, up 2 million over the year, and 1.5 million 4G customers, demonstrating an improvement in the quality of our customer base. We made significant further improvements to our voice and data networks to close the gap to our main competitor. We added nearly 500 4G sites to increase 4G coverage to 70%, and 1,500 2G and 3G sites were modernised, with new equipment and single RAN technology. As a result, dropped-call rates improved by 19% year on year. We expect to close the performance gap further over the coming months.

KDG, which reports in a couple of weeks, pre-released some key figures today, which show continued growth. Revenue grew 5.8% compared to Q4 +3%, and net broadband additions of around 83,000 were similar to the prior quarter. As you know, we commenced the integration programme in April and we’re on track with our plans. We’ve commenced cross-selling as of May, and this is taking place in 600 Vodafone stores, which is about half, and 200 KDG stores, which is about 90% of the footprint.

Finally, we have strengthened the management team through the integration of KDG with the appointment of Andreas and Manuel in the Vodafone Finance Director and Fixed Director roles respectively.

Turning to UK on slide 13, here the basis of reporting has changed, as the UK now includes the UK specific operations of Cable & Wireless in the organic calculations for the first time. This had a 2.6 percentage point impact on growth in Q1. We have restated growth for prior periods to help you understand the trends. On this basis, service revenue was down 3.2%, compared to 4% in Q4. Taking the mobile business first. Mobile service revenue declined by 0.6%, compared to a decline of 3.8% in Q4. The improved trend reflects the combination of a two percentage point benefit from the MTR unwind and a one percentage point underlying improvement in our commercial performance. The overall consumer mobile business returned to growth in the quarter, led by a 3.8% increase in consumer contract revenue, with continued good traction of 4G-bundled-with-content packages, which is helping stabilise ARPU. The rollout of 4G services continued, achieving 40% population coverage and hitting the 1 million customer mark last week. We continue to enhance our content offering, adding Netflix from 1 July.

Although not on this slide, we did see a slowdown in contract net additions, which mainly reflected the ongoing decline in the handset market in favour of SIM-only and some evidence of postponed purchases ahead of the iPhone 6 release later this year. In addition, we continue to see revenue declines in enterprise and consumer prepaid, due to competitive price pressure. In the fixed space, service revenue declined 10% due to price pressure and a cut in fixed termination rates. Excluding this latter point, the underlying fixed service revenue fell 7.4%.

The integration of Cable & Wireless continues to proceed in line with our overall business plan as we drive the network and business integration. We are also encouraged by our fixed sales pipeline. We are making good progress on new store openings, reaching 15 by the end of the quarter out of the 150 target And, as you can see on the right-hand side of the page, we are focused on the expansion of our 4G coverage, and, within London, our dropped-call rate improved to 0.86% from 0.97% in Q4. However, clearly, we have more to do.

Moving to Italy on page 14. The market remains extremely competitive, as we continue to suffer from the low level of prices following last summer’s price war, with a number of operators still discounting headline prices to attract new customers. As a result, our consumer ARPU and customer base trends remain under pressure. However, there were headline price increases by most players over February and March, and we have also put through some further increases in June. However, the two smaller operators remain aggressive. These higher prices have helped deliver a two percentage point improvement in revenue trends quarter on quarter.

The momentum in the enterprise segment remains positive, with continued growth in customers of 25,000 and a seven percentage point improvement in churn compared to last year. Fixed line revenue grew 1.5%, as the broadband customer base increased by a further 25,000 to 1.8 million. We now offer fibre services through wholesale agreements in 55 cities and we are progressing well on our own fibre build, remaining on track to pass 6.4 million homes over the next two years.


25 July 2014 6

Moving to India on page 15. Service revenue increased 10.3%, driven by continued customer growth, higher data usage and improved voice pricing. However, the pace of growth slowed compared to Q4, which was expected, and reflected the lapping of last year’s voice price increases. Mobile customers increased by 3.3 million during the quarter, giving a closing customer base of 170 million. Data usage grew 102% during the quarter, split 3G growing 185%, 2G growing 67%, primarily driven by a 28% increase in active data users and a 46% increase in data usage per customer. We now have 57 million data customers, including 10 million 3G customers, with over 29 million smartphone users, representing a 17% penetration of the total customer base. Data now accounts for 11% of service revenue, compared to 7% a year ago.

Turning to India’s Spring programme, we’ve deployed nearly 2,000 new 3G sites. We remain optimistic about 3G in India as we continue to expand our network and leverage the benefits of 3G roaming, which was permitted earlier this year. In addition, we are well on the way to open 150 Vodafone branded, large format stores focused in the urban areas to provide a higher level of service to small businesses and consumers. We continued to expand our M-Pesa service in India, where we now have 66,000 sales agents nationwide, and 1.5 million registered users, of which around 300,000 are active. While the timing is still being confirmed, it’s worth noting that we anticipate another spectrum auction later this fiscal year.

Moving to page 16, Vodacom’s organic service revenue was flat in Q1. In South Africa, organic service revenue decreased by 2%. This was driven by a 50% cut in MTRs, which led to a four percentage point negative impact on growth. In addition, price competition in the prepaid segment in South Africa has intensified significantly, with effective prices down 25% year on year in Q1. However, we have responded well, with targeted promotions, regional offers and dynamic discounting based on successful ‘much more for more’ design principles. We also continued to deliver strong growth in data revenues of 18.5%, driven by the penetration of smartphones and tablets which increased 19% to 8 million devices, and expansion of our coverage, with 4G to 58% population coverage and 3G to 96%.

Vodacom’s mobile operations outside South Africa delivered service revenue growth of 8.4%, mainly driven by customer growth. This was down from around 15% in Q4, due to pricing pressure, mainly in Tanzania and the DRC. M-Pesa continued to perform well across all of Vodacom’s international operations, with over 4.8 million customers actively using the service. In Tanzania alone, the service now accounts for 21% of revenue and around half its customers use it.

Last but not least, Spain, on page 17. This is a market where the triple pressures of economic weakness, MTR cuts and significant price discounts for converged services have combined to reduce service revenues by 15.3% year on year. Although not on this slide, the revenue trend in mobile deteriorated, with service revenue falling by 17.6% versus 14.4% in the prior quarter, as we responded to competitive pricing and the mobile-only market shifted towards SIM-only and mid-tier handsets.

However, many areas of our commercial performance continued to improve. We delivered a 3.7 percentage point reduction in contract churn, and we’ve seen continued take-up of Vodafone Red and 4G, with 1.5 million and 1 million customers respectively. In contrast to mobile, our fixed business continues to show strong momentum, with revenue growth remaining positive at 7.3% year over year, as we added 48,000 new customers during the quarter. At the end of June, we had 0.6 million homes covered by our joint fibre network, and, as of last week, this was 0.8 million. The completion of the Ono transaction will significantly strengthen our competitive position in the market, with cross-selling due to start form Q3. Ono report in early August, and at this stage performance is in line with our business plan.

Looking out to Q2, headline revenue growth will benefit from a 4.5 percentage point improvement from the MTR unwind. And on that, I will now hand back to Vittorio to summarise.


25 July 2014 7

Summary

Vittorio Colao

Thank you. I am on the last page, so key points:

performance in Europe stabilising quarter on quarter in several markets;

strong customer growth and data take-up in emerging market continues;

we are pleased with the progress on unified communications strategy, progressing NGN plans in Germany, Italy, Spain, Ireland, Portugal, as I mentioned earlier;

KDG and Cable & Wireless integration on track, Ono just completed, so we start integration now;

Project Spring really at good speed, about 25% completed thanks to the work done in the previous years on modernisation and therefore enabling the network for this new wave of investment;

we maintain a strong balance sheet, as Nick has indicated, and we confirm the outlook for 2014/15.

I think I will now take your questions, asking Philipp Humm, who runs Europe, and Steve Pusey, who runs technology, to join us.


25 July 2014 8

Questions & Answers

Akil Dattani, JP Morgan

Hi, good morning, Akil from JP Morgan. A couple of questions, please. Firstly, if we look at the revenue message, it does sound, from what you said, Vittorio, that you’re much more comfortable in a number of markets, particularly in terms of this quarter-on-quarter stabilisation, and, if we look at your ARPU trend specifically, it does look like we’ve seen that across quite a number of markets. Could you maybe help us understand what you think is driving that? Is that a sense of easing pricing pressure in markets, or is that simply the dilution from bundling starting to unwind? And, I guess, if we think about the overall revenue message for the next few quarters, Nick mentioned that you expect an improvement into H2. Could you just help understand how MTR phasing improves and helps into next quarter, and, more specifically, when you talk about improving revenue trends, are we talking about something more than just that MTR unwind? Is this actually a fundamental underlying improvement in Europe?

And then, secondly, if we move onto data, two things on data. Firstly, in Europe, we have seen quite a marked improvement this quarter versus the run-rate of data traffic growth in prior quarters. Could you just help us understand what’s driving that? Is that a strategic change in how you’re pushing data? Is it just a compounding impact of the 4G adds growth that you’re seeing at the moment? And then, adding to that, you’ve talked about a number of content deals you’ve structured across your major European markets. Any data that you might have around anecdotally how that’s driving data uptake and also the economics of data as you look forward would be useful as well. Thanks a lot.

Vittorio Colao

Yes, Akil, good morning. Thank you for your question. Let me answer the first half of the first question and the second, then give to Nick the detailed answer on – a more factual based answer. So, first of all, what’s going on is really your question and how confident we are that things are improving. I would not like to call now a change in trend. I think we said that the second half of the year is when we expect more improvement.

I think that what we are seeing today is some positive impact of the actions that we have taken, and particularly I want to go back to your question on data. We are clearly seeing that moving from 32% to 52% coverage of 4G, starting to push 4G, which now we have and we have with the good frequencies, with the 800 frequencies, and bundling with content is clearly accelerating data usage. And, again, here, I can tell you that clearly the availability of content, the richness of content and the ease of access to content is very important because, of course, it gives a strong motive for getting also higher packages. And, again, this is anecdotal evidence, but going around the shops asking my colleagues who are there, the ones who used to say, ‘Well, one gig is the right thing’, now they say two gig or four gig is the right thing to advise the customers in terms of adoption.

So that is the good thing, and, quick frankly, credit to Steve Pusey and my colleagues, we also have done tremendous work on network. If you think that we are already at 25% of Spring, if you think that we are already improving the number of sessions – I mean, three quarters of our sessions are at the speed of 3Mbps and up, which, again, gives a good experience, and this is just the beginning. I think these are early signs. I don’t want to call it in financial terms yet, because I think we still have a lot of competition. I still see a lot of silly promotions here and there, and, therefore, I would revert to Nick for a well informed comment about trends.

Nick Read

Morning, Akil. What I would say is the MTR unwind effect of Spain, Italy, Turkey in Q2 is about 0.9 percentage points, so that will be a benefit, and, just to build on Vittorio, I would argue that we’re sort of seeing five factors feeding through into our numbers, so first of all contract ARPU and just in Europe, especially Germany, UK, starting to stabilise – South Africa as well; good net-add performance, churn across the piece, so just our contract consumer performance. Secondly, the data acceleration, as Vittorio mentioned, is happening not only in Europe but across the emerging markets. Fixed revenue went positive, so 0.1% versus down 1.8% in Q4, and then of course you’ve got both enterprise, with VGE starting to grow at 1.6% and AMAP obviously growing with customer growth, pricing opportunities including India, and data. So these would be, I would say, the engines that are underlying the performance.


25 July 2014 9

Tim Boddy, Goldman Sachs

Thanks for the question. I wanted to ask a bit about your progress in the fixed-line market, and in particular it’d be really helpful to understand where you see the best opportunities as a wholesaler, given that, while there’s good progress in owning your own infrastructure, you’re still mostly a wholesaler across the continent, so it would be great to understand where you think the kind of gap between retail and wholesale prices is most attractive for you to take share; secondly, whether your strategy as an attacker is going to be to use this as a loss leader to try and secure some of your mobile contract customers through bundling or whether you think there’s really a scope to take incremental EBITDA. Lastly, you didn’t mention fixed in your slide on regulation, and I wonder whether you see scope for stronger protection, for example in terms of margin squeeze regulation, as being on the EC’s agenda. Thanks very much.

Vittorio Colao

Yeah, good morning, Tim. I’m not sure I can answer in great detail to the first question, but let me start to give you a little bit of what I think. First of all, the loss-leader theory – I don’t like it structurally. We are not here to ruin somebody else’s business; we are here to make money ourselves, and quick frankly it is an opportunity. We have very good offers, where we start with fixed line, and we have good traction and good credibility – of course, different levels in different markets. We will try to basically create value in the fixed business, not simply defend the value of the mobile one.

In terms of wholesale and owning infrastructure, clearly it’s a trade-off between capital deployed and the margins. We have a variety of arrangements. In general, they’re all, I would say, decent arrangements that allow us to do business for sure, and this kind of transitions into the third of your questions. For sure, the regulatory and the legal activity in the countries will have to be stepped up in order to ensure that no margin squeeze can take place. So, philosophically, I’m more for seeing this as a great opportunity. Vodafone has access to 40 million homes today in Europe. We have 11 million customers after the Ono acquisition. It’s an opportunity to create – and, as Nick said, we are already – a quarter of the company’s already not purely mobile any more. It’s an opportunity to create value and to build value more than a defensive thing as you indicated.

On the regulatory front, it’s going to be more market-by-market, given the different regulations that are still in place in Europe. We would support, clearly, the harmonisation of regulation across Europe, but I think it would take quite a bit of work with the new Commission to go there.

Tim Boddy

Thanks very much. I think just in terms of the first part of the question, I guess when you talked about this previously you were looking at Spain and Italy, for example, as markets where the wholesale prices were high relative to retail price, which made the business case more challenging compared to, say, UK and Germany. Is that still how you’re seeing it, or are there signs of change?

Vittorio Colao

I didn’t want to give you – I knew you wanted to go there – I didn’t want to give you a specific answer on any specific country. Clearly, the preservation of a decent margin between wholesale and retail is essential to allow us to compete there, and special arrangements or special contingent deals with large incumbents are very important for us and for them to preserve healthy markets. And, again, I don’t want to comment on specific situations today. We will make sure that this is the case everywhere. When it is not the case, then clearly investment is the other alternative.

Tim Boddy

Thanks very much.

Nick Delfas, Redburn Partners

I just wanted to follow up on your comments, Vittorio, about stabilisation. So we’re seeing much flatter performance quarter on quarter, for example in Italy and Germany. Are you saying that you’re not confident that that will continue into the next quarter and the one after or that you are? And then, secondly, on content, you’ve obviously got the creation of Sky Europe today. Could you talk to us a little bit about how you see content, what your role in the content market’s going to be long term? Thanks.


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Vittorio Colao

Why don’t I pass the first question to Nick, and I take the content one?

Nick Read

Yeah, I would say, Nick, that our initial reaction is obviously it’s good to have stabilised revenue trend on both of those countries quarter over quarter, but, of course, as you know, Italy has been going through some very aggressive pricing, so it would be a bit bold of us to call that at this point in time. I think we have to see what the summer promotions and activities in each of the countries – how that develops over the next quarter and see, but what we’re seeing is there’s good pricing action being taken by us and the incumbents, and also we’re seeing good consumer contract performance with data uplift, so some encouraging parts of the commercial execution, but not guaranteed yet.

Vittorio Colao

On the content question, it’s very interesting what has been announced today. Clearly, it’s another proof that, in a more and more digital world, scale and cross-country will become important, which is where we are today. We are very pleased with our cooperation with a number of content firms, including, of course, Sky, and I would say I see this as a positive, because it gives us the possibility, given our scale and given who we are, to cooperate more with them as much as we are cooperating with the other top players like Netflix or like Spotify. So, for us in this space, it’s a great opportunity to really boost the value, the perception of the value of 4G and the value of our access to homes and to individuals at the same time. So we are great distribution partners for these guys, and they are great boosters of the value of our networks.

Nick Delfas

Thanks very much.

Justin Funnell, Credit Suisse

Just to follow up firstly on the data growth question, it’s quite a big pick-up in data volume growth in Europe on what is obviously quite a large base these days. Do you have any more stats on upselling or whether you are seeing a higher percentage of customers buying a bigger tier of data, and is that in any way at all turning into more revenue, or just being given away through competition, please? And, just as an add-on, are we having to start to think about capacity issues in the network a little bit harder now, if volume growth’s actually accelerating in Europe? Are we going to have to start thinking about more capacity capex over the next few years?

Secondly, on the Drillisch question, obviously you’ve been part of the remedy setting process in Germany. Obviously, Drillisch are I think an important service provider to Vodafone. What is your understanding of the likely effects of the Drillisch wholesale deal in Germany next year? Thank you.

Vittorio Colao

So why don’t I pass the first question to Philipp, the second – the capacity question to Steve Pusey, and maybe Philipp you can also comment on Drillisch, if you want to comment on Germany, given that you are close.

Philipp Humm

Yeah, morning, Justin, and talking now first on data, so we have clear evidence of data growth in different markets. However, it’s market-specific, and different for market to market. The best example is for sure in the UK, where we were able to upsell our customers as they move from 3G to 4G, tripling the data consumption they then have and increasing our ARPU by more than £5 – net ARPU by more than £5. I think that’s probably the strongest case, but in every single market we have similar cases, like, for example, in Germany we’re trying to upsell customer from a 3G smart tariff into a Red 4G tariff, which then again adds another €10 to it. So that’s what we’re doing on the data side, and the proof points we have there.

Let me just comment briefly on Drillisch, and then I hand over to Steve. So I don't think that allowing now Drillisch to wholesale on the network of Telefonica will fundamentally change anything in the German market. We have already today pretty aggressive MVNO terms in the market. This is a different model, which is more a fixed-cost model than a variable model, so they will have to fill it with a certain volume, and so we don’t really think it will change anything, and it goes against the existing or the leftover capacity,


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because the Bundesnetzagentur has decided to auction out the excess capacity, which we believe is also a good competitive move from the Bundesnetzagentur.

Steve Pusey

Good morning. Hi, Justin, good question. Certainly, traffic is increasing at a healthy rate. Last quarter is at 64% year-on-year growth; we’re now up to 73%, and that’s very healthy, and from a number of the sources that you heard: content and extra usage etc. So that’s very pleasing. In terms of the stress on the network, of course we were planning for this and we are planning for it through Spring, so our network statistics in terms of those that we measure – average utilisation, our stats on busiest cells etc. are remaining pretty constant. You have to remember that, with a capital programme of this nature, there’s inherently more capacity going into the backhaul and the transport networks as we roll out every 4G site and its adjacencies, so we’re increasing capacity, and we’re quite comfortable that we can manage this and it’s not putting any extra strain on us.

And in terms of extra capacity investments, no, it’s happening naturally through this investment programme as we upgrade to carry more 4G. I think what you might find is an accelerated growth of this nature may well put extra stress on some of the third and four tier players as traffic grows so aggressively, but we’re very pleased with it; we’re accommodating it; and I think it should be viewed as good news.

Nick Read

And, Justin, just to build on Philipp’s point on data monetisation, obviously, for emerging markets, as we are expanding 3G and the data’s growing over 100% year on year, India’s browsing revenues increased 62% year on year in the last quarter; South Africa’s data revenue’s have grown 18.5%, so emerging markets have really been able to monetise the 3G rollout.

Justin Funnell

Thank you.

James Ratzer, New Street Research

Good morning, two questions, please. First one was just regarding the capex spend on Project Spring. I think you were saying you’d spent about £800 million last quarter, and I think there’s about £500 million booked in the last year, so it looks like you’ve spent about £1.3 billion on Project Spring, and you’re now saying that the project’s about 25% complete. I mean, that would imply Project Spring might end up costing around £5.2 billion. The guidance was £7 billion, so, I mean, do you think there’s now a chance that Project Spring can be delivered more cheaply, more cost-effectively than the initial guidance you’ve given?

And, secondly, I had a question just regarding Italy. You mentioned the FTTC network build is on track and you’re starting to build that. Could you please give us some more details on that? How many homes have you actually passed with that at the moment? How many municipalities are you actually building out on? What will be the kind of quarterly run rate in terms of homes being added onto that network? Thank you.

Vittorio Colao

I’ll take just a piece of the question. The 25% is – and I’m responsible for that – is not a financial measure; it’s a measure of what we have achieved in terms of workload, and is what we used internally to say, ‘That’s where we are operationally.’ Nick, any comment on the capex?

Nick Read

Yeah. James, you quoted a lot of numbers there very fast. Basically, our capex programme is in line with expectations, so we’re talking £19 billion over two years. When we’re talking about that, that includes a number of components: mobile network, fibre, enterprise, store rollouts, etc., our IT programme, so just not mobile networks. We were £1.9 billion for the quarter, so what I’d say is we’re well within the envelope that we are planning to spend, the £19 billion.

Vittorio Colao

Philipp, on Italy.


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Philipp Humm

On Italy, we are well on track to achieve our 6.4 million households planned. We are now basically started and built our first own cabinet, and we have 170 cabinets up and running already now, and plan to increase that to 600 by September, and then multiply that times households per cabinet and then you’re there.

Vittorio Colao

And keep in mind that here is fibre to the kerb, and therefore we measure by cabinets, necessarily, first, more than homes. It’s a not a fibre to the home project.

James Ratzer

And how many… I know you mentioned it’s by cabinet, but how many homes would be covered by those first 170 cabinets, please?

Philipp Humm

Yeah, I mean, we will give you that one maybe separately, but typically around 400 to 500 homes per cabinet.

James Ratzer

Great, thank you very much.

David Wright, Bank of America Merrill Lynch

Good morning, gentlemen, a couple of questions from me. First of all, I think on Project Spring you mentioned high-capacity backhaul sites, and that’s one of the metrics that you have there, and you’ve given a target. I think, Vittorio, if I’m right, you said 22% of backhaul sites are currently fibred. When you say ‘high-capacity backhaul sites’, do you mean fibre, and can you give us maybe just sort of an idea of where that 22% goes over the next year and couple of years?

And then my next question is just on Spanish fixed. Clearly, you mentioned the recovery in fixed-line growth – revenue growth - and Spain has one of the biggest absolute line growths, I think, over the last 12 months, but although you’ve grown your lines 26%, revenue’s only grown 7%, so is that a sort of indication of the kind of deflationary pressure we should build in to convergent services within Spain and maybe even thinking about some of the other European countries? Thank you.

Vittorio Colao

I’ll take the first one and pass the second to Nick and Philipp. When we talk ‘high capacity’, we mean two different things. We mean fibre, or we mean high-speed microwave, and the 22% that you mentioned is only the fibre component. Is that clear?

David Wright

Yeah, that is clear, and do you have any indications within the Spring plan of how that would evolve on a 12 and 24-month view?

Steve Pusey

On the fibre builds, we expect to take fibre to the sites at beyond 30%, possibly more than that, but at least at 30% of sites physically connected with fibre. One should assume that’s all of your urban centres and metropolitan facilities. The high capacity beyond that will take that to over 90% in total, including the fibre, so the residual taking it to a 90%, and then what we mean by it is capable of at least a gig. We don’t need anything like that right now. The busiest 4G sites anywhere in the world are only carrying about 250Mbit connection requirements maximum, but we put the capacity and capability in, and we’ll just add and bring it up to the full levels as we need, so those are the sort of metrics: 30% and over 90% in total.

Nick Read

David, on the Spanish fixed, I mean, Quarter four service revenue for fixed grew 6%, Q1 grew 7.3%, so it did accelerate. Bear in mind this is revenue to do with our do-it-yourself products, so obviously as we start to


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sell our fibre-to-the-home products, that will have a higher ARPU and therefore drive an acceleration, and obviously we have the benefits of the Ono network as well. I don't know, Philipp, if –

Philipp Humm

Yeah, I mean, adding to that, with the higher ARPU on FTTH, I think overall the market in Spain is still competitive, right, so we still see quite some aggressive price moves, to which we reacted on the mobile side but also on the fixed side, which is why also our ARPU year over year is still down on broadband. We have taken measures across the board from our side to further stabilise ARPU and increase prices on some of the rate plans, and we would expect, going forward, let’s say, the market also here to stabilise and improve a bit on the price side.

You asked whether we can take Spain and then basically use Spain as a model for other markets. We believe not. I think Spain has been quite unique, with the Fusión move from Telefonica at the time, and the only other market that has followed was Portugal, and we don’t believe that the move was a very good move for the overall profitability and revenues of the market, and we believe that other markets will behave a little bit more rationally and better on the price side.

Vittorio Colao

Yeah, I would say, more in general – I think we’ve said it many times – what happened in Spain was that an integrated product that was supposed to create value actually has triggered competitive reactions in both the fixed and in the mobile segments, so the fixed guys have lowered the prices of mobile; the mobile guys have lowered the prices of fixed; and the converged guys had to lower everything in order to be competitive. This has been particularly typical of Spain, and to some extent Portugal, but mostly Spain, because of the presence of stronger cable guys and because of the presence of strong mobile guys. Now, we bought one of them. Consolidation and more pricing discipline hopefully will not replicate the same result everywhere else.

David Wright

Okay, thank you, guys.

James Britton, Nomura

I’ve got two questions, one on Italy and Germany. And, on Italy, I guess it’s a follow-up on the convergence proposition. Italian convergence packages are being promoted again, the summer campaigns, so can you just comment on whether you’re happy you’re competitive today with the rival convergence offers? Are you also happy with access to TI’s fibre so that you compete for higher ARPU convergence customers, and how quickly do you expect the Italian market to embrace convergence in general?

And then, secondly, on Germany, I just wanted to get a little bit more perspective on why contract customers adds – sorry, contract consumer adds were a fair bit weaker this quarter despite the heavy investment, and, in this context, do you think Vodafone Red price points do need to be rebased to become more competitive in the market?

Philipp Humm

Yes, let me start with Italy. I don't think we have seen really great traction for the converged offer from TIM, and we don’t believe that Italy, if we compare again the extreme case, will move in any direction like Spain or Portugal has moved to, so I think from that point of view we feel quite confident that the market will continue to behave in the right direction. We have a good and competitive offer in the market. We used the TIM DSL and unbundle part of it ourselves, and we now did another contingent deal, pretty similar to the one in Germany, with TIM for another 100,000 households, so I think we have overall now good wholesale access there. That being said, we are economically incented to do our own rollout, which is why we are trying to reach FTTC households with 6.4 million in total, so we have, with all of these measures, I think, enough possibilities to be competitive on the fixed-line space.

Coming to Germany, consumer net adds were a bit weaker in the first quarter compared to the fourth quarter of last year. We think overall from our portfolio we are competitive in the market, so we don’t see a need to change our pricing portfolio. We see a need, here and there, to maybe ramp up a little bit more promotions to generate more traffic, which we are doing currently in the marketplace, but not much more than that. We think the market overall is a bit calm right now, as people are waiting for the iPhone to come later in this


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quarter. So overall we are quite happy where we are. We are ramping up also our second brand, Otello, and we should see some positive development there in the coming quarters as well.

James Britton

Thanks very much. Honestly, can you disclose how much you’re paying for fibre-to-the-cabinet wholesale access?

Philipp Humm

Which country?

James Britton

That’s in Italy. Can you disclose the terms of the fibre access with TI?

Philipp Humm

No. The regulated one I can tell you, which is the bitstream one, which is €21.5, and the SLU is €6.2. These are the two regulated ones. The negotiated one I can obviously not disclose.

James Britton

Great, thanks.

Simon Weeden, Citigroup

Thank you for taking the question. Good morning. Three short questions, if I may. The first is regarding Ono and the deal with Orange. You’re putting 1 million Ono homes into that arrangement, and I just wondered why not… Basically, why is that the right decision? Why didn’t you do all of Ono homes, or indeed none of them? But doing 1 million of them suggests that there’s something in the contract with Orange that you were trying to specify through this mechanism.

Second is on – particularly with India in mind, but emerging markets in general. How do you feel yourselves in terms of positioning for over-the-top risk as data does pick up and browsing gets bigger and more handsets get capable of connecting and providing a good data experience? What is the risk for the text volumes, and indeed text revenues, particularly thinking about India? What can you do about that? What are you doing about that?

And, then, finally, in Germany, whether you think you could use some further fibre network infrastructure, and whether therefore Versatel might be of interest to you, or whether in fact it overlaps a lot with what you have already. Thank you.

Vittorio Colao

Simon, let me give you a little bit of answer to the third question and half of the first and then pass to, I would say, Philipp for the more detailed. All these questions about – because they also link to James’s question before and also the opening question of – who asked it? – of Tim Boddy – all these questions of retail versus wholesale and would we buy new infrastructure; are the wholesale prices good enough; are the negotiated prices good enough, at the end of the day are all very difficult to answer, because the reality is we are in a constant make-or-buy alternative, and, in a way, this is the beauty but also the difficulty of our Unified Communications strategy. The beauty is that you can, quite frankly, optimise, in a smart way, country by country, and, at any point in time, we can change a decision, and the Ono one is a good example, but we can in theory… I mean, you mentioned Versatel. I will not comment of Versatel specifically, but of course we will always look at, in any country, at available infrastructure compared – the available infrastructure, the footprint, the overlap with our customer base, with the negotiated or regulated conditions, and make a make-versus-buy case. And so, yes, be ready to see that our name will be attached to any infrastructure, because, by definition, we will look at all of them.

Now, the make-versus-buy works also in the other direction. When we buy Ono, we had an agreement with Orange to build. The reason why we gave access to a million houses is because we save money versus what have been them, and it was a good partnership, as I said, from the beginning, and I was sure that we would find with Orange a mutually satisfactory to reach our own original objectives, both of us saving some money. You want to add something, Philipp.


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Philipp Humm

Yeah, maybe just to add to that, besides saving a significant capex and generating additional NPV, one advantage of striking that deal now with France Télécom is that we have less homes with three infrastructures, fixed infrastructure but with two, which is obviously much better also for the long term, and we reduce significantly the overlap, so we are able to harmonise the build-out programme, which I think is very positive. And, as we were committed from the outset with Orange to do 3 million homes, right, I think we found a very intelligent way of sticking to our commitment and, at the same time, being much more economical for the long term.

On Versatel, maybe just – I can’t comment, let’s say, on anything specific, just to say that Versatel basically has two activities. One is city rings; the other one is DSL, and we, today, have very good, long-term-access fibre deals with Versatel, but obviously we wouldn't comment whether we are or are not contemplating further acquisitions.

Vittorio Colao

Nick, in your old role as head of emerging markets, do you want to say something about OTT disintermediation risk in emerging markets?

Nick Read

Morning, Simon. So what I would say is a couple of factors. We have looked at this several times in terms of developing our commercial strategy. First of all, bear in mind text revenues are fairly low as a percentage of service revenues relative to where Europe was. Secondly, voice pricing is tremendously lower versus where European pricing was. The third thing is, 3G data packs, if you look at the ARPU of – so it’s like 250 rupees for a gig in 3G, so therefore the ARPU you capture by someone going onto a 3G data pack to then use smartphones, we’re already securing a high ARPU from the customer. We’re developing Message+, voice-plus services, so we can expand the functionality that we can offer customers, and what we’ve been doing is driving in integrated bundles and offering greater value faster than Europe did at this stage of the cycle when they were more obsessed about, I would say, metered charging.

Simon Weeden

That’s great, thank you very much.

Robert Grindle, Deutsche Bank

Good morning. Sticking with the first question on the AMAP theme, the extra price competition in South Africa, has that been a direct result of the recent MTR cuts, or has competitive pricing deteriorated further as the quarter progressed as competition reacted to those MTR reductions? And then, moving to the UK, any update to the thinking on the need to offer consumer-convergent products there? I guess your silence is almost deafening on the subject. Are you just waiting to see what other participants in the market plan to do? Thanks.

Vittorio Colao

I would take both questions, and maybe, Nick, you can, if you want, comment on some. The price moves in South Africa clearly have been the result, in my view, of two things. One, the original move – the MTRs reduction clearly has – and the change in the symmetry has clearly enabled Cell C to start aggressively. My judgment, there has also been a little bit of an overreaction from MTN. It’s always good to react to competitors’ offers, but, if you force them with shoulders against the wall, then there is a further reaction. So I don't know whether you call it increased competition or all linked to the original move, but I would say there has been something at the start of the MTRs, and then the market has gone a little bit, probably excessively, at a low point.

I don't know if this is sustainable long term. I doubt, and I believe that my colleagues in Vodacom are doing the right things in bring selectively very responsive, but leveraging on their great ability to use flexible pricing, dynamic pricing and all the smart pricing and marketing tools they always use to have a reaction but not have a reaction that put anybody with their shoulders against the wall.

Second question, I was really surprised that it took so long. I mean, 40-something minutes without the question on UK fixed. It was really remarkable. As I said, our strategy in Unified Communications is country-by-country, and I think by now we have given proof to analysts and investors that we are serious


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and that, in any country, we have made the best move, which surprisingly included even partnering with a power company and finding myself along power lines for the first time in my life to see fibre hanging from poles. In every country, we work for the right thing. In the UK, we are 50% an enterprise player, so, in that sense, we are pretty solid and pretty competitive. It’s interest to note that BT have launched One Phone when Vodafone has One Net. We don’t call these things phones anymore, but clearly this is an interesting move on their side. We don’t feel that we have anything which is not competitive there.

On the consumer side, we keep our options open. We are working on some of them, and we will give you all the details when we are ready, and we clearly want to be competitive in the consumer sector as well.

Robert Grindle

Okay, thanks very much. That was very clear.

Andrew Beale, Arete Research

Hello. A couple of questions. First of all, could you give us a bit more on the early cross-selling impact that you’ve seen since May between Kabel Deutschland and Vodafone Germany? Perhaps, if you could update us on the cable integration opportunities and challenges now that you’ve got that process underway, that would be very helpful. And then, secondly, on the roaming regulations, in the presentation, you highlighted the need for a bit of clarity on the fair-use policies and so on. Just wanted to double check that you’re still confident that the risks of roaming competition from low-cost, low-price markets is firmly back in the box, or are you flagging it as an issue that still needs to be properly addressed? Thanks.

Vittorio Colao

Andrew, unless my colleague, Philipp, has more, the answer to the first question is no, I cannot give you more details on the cable integration because, to be honest, it’s early, but maybe Phil ipp has more anecdotal evidence of it. But, personally, I don’t have any financial information on that. Philipp, welcome to comment if you want.

Philipp Humm

Yeah, maybe just to say that we are selling into each other’s bases, and we created the umbrella brand, Vodafone Zuhause Plus, which is doing very well. We have now more than 700 Vodafone shops which are involved. We have another 200 KDG shops which were involved, which are all fully trained to be able to cross-sell both products, and I think the overall reception from our employees, the numbers and the reception from our partners – franchise partners has been very, very positive.

Vittorio Colao

So no financial data as well, okay. On roaming, now, that’s an important question. I mean, never give promises in this field. My sense, from the contacts I have got both at the high level and also the operating level in the Commission, is that the risk that you are referring to, which is the classic contamination from the low-cost, low-spectrum environment into the big countries’ risk, is very well known by the Commission, and also by Parliament, and there is a strong desire to avoid it, and our engagement as Vodafone has been very productive with the Commission in the last four weeks on that topic. The type of proposals that we have put forward and the type of reasoning that I can read in their position I would say is, in that sense, positive. It is important that we define what fair-usage policy means, because the time it takes to implement technically solutions across countries, across operators and so on is not something that you do overnight. So we raised the issue with them, and we found them prepared and aware on both the risk to be avoided and the time that it requires to provide solution.

Having said that, as Vodafone, we keep pushing ‘take your home tariff abroad’. We have the high-end users all very happy because of it. We have now included the US, which was my obsession, my personal obsession, India and the Pacific. At the end of the day, I’m not so sure in two years’ time this will be such a big issue, but we are working for making sure that the risks stay in the box, as you said.

Andrew Beale

Great, thank you.


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Jerry Dellis, Jefferies

Good morning. I’ve got two questions, please. Firstly, the increased level of customer investment that you’re running at presumably delivers quite a lot of benefit in terms of the quality and the volume of your customer intake and also helps to reduce your churn, and those are all things that will be helping revenue trends. So the question really is, what evidence do you have that – where do you get your comfort, if you like – that these improving revenue trends will continue when you start to ease back on levels of commercial investment? And then my second question is just really to understand the thought process behind some of the tariff adjustments that you’ve been making recently in the UK and also in Spain. We’ve seen amounts of data allocated to Red bundles increased in the UK at broadly the same price; I think in Spain prices came down, actually, a little bit, and I really just wondered how that’s consistent with the ambition of getting customers to trade up through the data tiers and to spend more. Thank you.

Vittorio Colao

Philipp, do you want to comment on this?

Philipp Humm

Yes, I would comment on the second one. So, on the price side, I think in both cases we reacted to the market, as the market was evolving from a data usage point of view into bigger buckets, which is in particular now the case in the UK, and, as we have seen ourselves quite strong traction for our 4G proposition, we decided to increase our data buckets there. In Spain, it was a bit the other way round, where we had to adapt our pricing, again, to competition, and lowered our price points in some areas. In the meantime, we have taken quite strong mitigating action, trying now to drive customers also here into richer content-4G bundles, also in Spain, which is showing very good traction now, and we launched that, I think, four weeks ago, so we see some very, very strong development also in this direction, right. So it’s always adapting yourself to the competitive environment you’re in, and then continuing to actively steer your tariff mix in the right directions, so that we continue to be ARPU-positive and not ARPU-dilutive.

Nick Read

The sort of simple version would be that, yes, we monitor the quality of our inflow by market, so the consumer contract ARPU stabilisation you’re seeing in a number of markets, like Germany and the UK. Also what we’re seeing in terms of Red European consumer contracts ARPU stabilisation is all a result of higher-end plans, higher-quality customers. You’re seeing churn consistently reduced across the board in all operations and, of course, we talked to the monetisation of data. I would argue these are all positives for connecting the right type of customer going forward.

In terms of customer cost, we remain at a normalised level, neither aggressive in the markets or uncompetitive and so, therefore, we would remain in that position going forward.

Lawrence Sugarman, UBS

Good morning. Firstly, could we just return to India? There’ve been some obvious political changes and also some press comments around potential regulatory changes. I just wanted to get a view as to whether you think there is some encouraging progress in this respect.

Secondly, there’s obviously the major launch of the iPhone and potentially that’s been one of the reasons that could be why there’s been a bit of a slowdown in customer contract net adds. I’m wondering whether, going forward, you have any thoughts about how that might impact in any particular market, from a margin perspective.

Finally, maybe you could give a few comments around the Dutch market, not because it’s a particularly big market in terms of your own performance, but it has been historically quite an interesting market in terms of over-the-top impacts. I just wonder how that has been developing.

Vittorio Colao

Let me take the first two and then maybe, Philipp, you can talk about the Dutch market developments. On India, what I can say is that it’s two different comments. One, the general mood is clearly positive, because the early statements and moves of the new Government seem to be pro-business. That would be very welcome and of course we would be very pleased to operate in that type of environment. Again in India, there is an awareness now, a very strong awareness, that reigniting growth or reaccelerating growth in the


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country, and having more stable pro-infrastructure policies, is essential for the future of the country; so positive vibes, yes, and a more constructive approach to regulation as well.

Of course, the other side of the story is our tax issue. The new Government has indicated that, for the past cases, they intend to let the processes run – our processes in arbitration. We have appointed our arbitrators; they have appointed theirs. We will have to appoint the joint one, and then this story will take its own course. That was question number one. Number two was – no, the Netherlands was number three, sorry.

Lawrence Sugarman

Just on the iPhone, sorry.

Vittorio Colao

How can I forget that? Now iPhone, again I can give you anecdotal evidence by going around the shops myself and asking my colleagues. We have the impression that there is a big pent-up demand, and that some customers are not upgrading or renewing their phone now, because they’re waiting for the iPhone 6. There is the perception that the wider screen will be an important thing, so our expectation and we are preparing our commercial plans for is that, when it comes, there’s going to be a big flow of people taking advantage of the wider screen and the new features.

Is this a bad thing? Not necessarily, because big screen goes together with video and entertainment. As Philipp has said, our policy, and now clearly our strategy, is clearly aimed at bundling content and pushing for higher allowances of data. If the iPhone 6 has the good characteristics that reports indicate, this is going to be for us another opportunity to push for upgrades, for real upgrades – not just the phone upgrade – and for higher usage. Netherlands?

Philipp Humm

Yes, to the Netherlands, we have seen in the Netherlands quite a strong impact of over-the-top play, in particular WhatsApp. I think one of the reasons that has been over the last year, one of the reasons is that the Dutch market has been pretty much a metered market, in particular in prepaid. SMS or, for us, overall down there significantly, -27%, and prepaid as a result also was pretty much down.

That being said, as the market has now evolved and we are actively working on its evolution from a prepaid market to a postpaid market, and from a metered market into a bundled or more limited type of market, or very free market, we are seeing very strong improvements, in particular in the Netherlands, now quarter over quarter. If you take the fourth quarter, we were at service revenue of -6.4%. In Q1, we are now at -4.0% year over year, and that includes already a 0.5% MVNO impact, so you see a significant improvement there, driven really by postpaid growth, volume growth and then ARPU, which is starting to show also here signs of stabilisation.

Adam Rumley, HSBC

Thank you very much. There’s always more that could be done by regulators to improve the investment environment, so two questions on that, please. Firstly, what would your priorities be in terms of the spectrum harmonisation that you mentioned? Indefinite licence durations look like a bit too big of an ask, but I was wondering what you thought might be feasible.

Secondly, what opportunities do you think are presented now that we’re moving towards a new European Commission, especially in light of Jean-Claude Juncker’s well publicised priorities? Thank you.

Vittorio Colao

I’d say, first of all, clearly Juncker’s statements or reported statements seem positive. It seems to put the development of digital infrastructure at the core of European policies. It was already the case before, but it’s very encouraging that this is mentioned as a first priority or an early priority.

On what can be really achieved here on spectrum, I have two opinions first. You’re absolutely right: indefinite is probably not feasible, but I think we can start to go to 25 years and we can start to go to different and more harmonised rules for assigning. We need to avoid auctions being structured in crazy ways. We need to start thinking of how to align the timing of the auctions. A very important point that I always raise is that this is not about countries losing jurisdictions; this is about aligning dates for release of similar spectrum,


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so that companies can have homogenous industrial plans across Europe. These two objectives – the duration, a reasonable extension of the duration, not indefinite – and a reasonable alignment of dates and methods for auctions, so that long-term industrial multi-country players like us can play their own strategy accordingly, are the two most important things that, if I were this new Commission, I would put as targets for this cycle. And of course , the implementation of the previous things that I discussed before.

Adam Rumley

That’s very clear, thank you.

Paul Marsch, Berenberg Bank

Thank you. I have two questions. Firstly on German prices, a similar question to the earlier one on Spain and the UK. In Germany, it looks as if you’ve added 50% more data volume into the Red tariffs across the board in Germany in recent days. If our analysis is correct that brings you into line with O2D’s tariffs below the 1-gigabyte level. Maybe you could just elaborate on the rationale for that move and how you’re expecting consumers to respond.

Then a more general question on regulation and capex: we saw Almunia twice now challenge the argument that capex is suffering in the industry, due to regulatory attitudes to in-market consolidation. He clearly does not believe it. Obviously we may get a change of personnel under the new EC President, so do you think that the EC has just got its frame of reference wrong in terms of the capex levels in the industry, the capex levels required to drive mobile broadband deployment forward and to achieve the EC’s objectives? Do you think there’s a potential deal here between the industry and the EC, under the new stewardship, which could result in capex perhaps increasing across the industry and staying high for the medium term, in order to help the EC to achieve those objectives?

Vittorio Colao

Philipp, do you want to comment about recent price changes?

Philipp Humm

Yes. The price changes you are referring to are in Germany are not price changes; they’re promotions. We always do promotions in all countries at different times of the year. In Germany, we do typically a summer promotion. The objective there is to drive up consumption, so that our customers who have Red plans really get used to higher data consumption and then, hopefully, will continue to want to stay on larger plans. That’s the idea behind it. You will see similar and different promotions across our footprint, if you look at the different countries.

Vittorio Colao

The best promotion we did in Germany was the one that gave 100 megabytes per goal scored by the German team.

Philipp Humm

We gave 1.8 gigabytes to the customers.

Vittorio Colao

Yes, 1.8 gigabytes to the customers as a result. It would have not cost as much in Italy or in the UK.

On the second question with the more serious tone, I think, Paul, you raise a point that is correct, but slightly off the mark. The real work that I, and I’m sure also all the other GSMA members, will have to do with this new Commission is really on return on capital more than capex, per se. As much as I was positive on the comments, or my comments, on their understanding of the roaming thing, I have to say that we still have to do some work to convince regulators in the member states and in Brussels that the return on capital employed is the metric that they should use. In order to have capex, you need to have return on capital employed exceed your cost of capital, as you learn in finance 101, not manipulating what they calculate as return on capital just to prove their point.

A lot of work we are doing internally at Vodafone is to prepare accurate documentation of what return on capital should be, in order to create positive conditions for return on a very important investment. This is the


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work that Vodafone has to do with the new leadership, which we have started already doing with the old ones. I agree with you, Vice President Almunia did not agree with our point. We had, even recently, an exchange of views. It is very clear that the old administration under him was clearly not in agreement on some of the fundamentals. Again, new administration, new people; we can work to make sure that this important concept is understood at all levels.

Ottavio Adorisio, Société Générale

Good morning, gentlemen. I have a couple of questions: the first is on free cash flow; the second is a follow-up from a previous one. On free cash flow, basically free cash flow this quarter has been impacted by capex, but became £1.5 billion over the level that you recorded a quarter last year. Half of it was the increase in capex due to Project Spring, then you mentioned, but you didn’t quantify, the impact coming from working capital and the fact that H1 EBITDA looks to be below the trends you expect for the full year. I would be grateful if you could just, if not quantify, please give a bit of colour of the components of the £800 million cash absorption.

Nick Read

I think it’s fairly straightforward. First of all, working capital is very lumpy quarter to quarter. The second thing I would say is that we did ramp up very quickly for spring in the fourth quarter. What I made in my commentary was just pointing out that some of that flowed into Q1. If you remember, we said we were spending around £0.5 billion on capex last quarter, which was non-cash-impacting, so that flows into this year.

Vittorio Colao

The second question?

Ottavio Adorisio

On working capital, it was clear; I was just asking if you could just give a number. How much is this quarter?

Nick Read

We don’t give out those numbers

Ottavio Adorisio

The second one is a follow-up from a previous one on the backhaul. I don’t remember who replied to that question, I think probably Steve, who quantified that the company is personally happy about the high-capacity backhaul you have and you plan to have, over the end of the Project Spring? My question is to Vittorio: how does that reconcile with the lobbying that, at the moment, Vodafone is doing with the Commission to basically include backhaul in the relevant market because of the unfair advantage that the incumbents are currently enjoying? Do you really need to access that backhaul or basically you don’t?

Vittorio Colao

How that reconciles, Ottavio, requires a pretty obvious answer. Everything I can get at a cheaper price than what I have today is still good, right? Don’t confuse a technological requirement, and Steve can talk about it, with an economic requirement. If I can access incumbent fibre at lower price than what they give me, it’s always better, right? At any point in time – it’s a bit like the same answer I gave before between are the wholesale prices good enough. For my whole life, by definition, I will always say that they’re not good enough, because even one penny is one penny. Steve, from a technical point of view?

Stephen Pusey

Actually, from a technical point of view, of course fibre has a larger capacity and we drive all of our infrastructure on a cost and economic basis to get more fibre versus the microwave. Technically, microwave can absolutely carry the capacity that we need, both now and into the future. Some of our suppliers are testing 40GB microwave. That might take three or four years to deliver, but the microwave path is well documented now and is being set into standards. The reason that we try to get more fibre is that the longer-term cost, and over many years, to upgrade microwave continually to higher speeds is technically a higher operational cost than a fixed fibre that’s permanent.


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Vittorio Colao

Where we can get it, the better it is.

Stephen Pusey

Absolutely, back to Vittorio’s answer.

Vittorio Colao

It’s an economics thing.

John Karidis, Oriel Securities

I’m very grateful. Thank you. Good morning. Actually, just two quick ones, if possible. The first one is: are you still comfortable that you can get access to Telefónica’s content at reasonable prices and soon enough and, if you are, why are you confident?

Secondly, throughout this call, you emphasised how Q1 performance compares relative to Q4. Is it still the case that you are hoping to keep up with other first-tier competitors, such as Deutsche Telekom and Telecom Italia possibly, going forward?

Vittorio Colao

John, I’m not sure I understand the second part of the question, the way you formulated it, because the answer is an obvious yes, and it’s not the fact that we compare to one quarter or the other that makes our reference competitors different. Our reference competitors are always the same and still the same. The whole company looks at them and everything, including our incentives, is geared at doing better than what they do.

What makes me comfortable that we have access to Telefónica’s content, again it’s the same answer as I said before. For the time being, their position, their statements are very much in favour of resale agreements. We are of course keen to get into those. Of course, we will need to continue to watch, a little bit like I said in the previous answer, that their price continues to be reasonable and that the conditions and the packages are fair, and allow us to do a good competition. To be honest, that’s valid for Telefónica. That would be valid for Sky tomorrow. That would be valid for everybody who owns content and resells content, and is at the same time a partner and a competitor. We will watch that space very carefully, as you would imagine.

Closing Remarks

Vittorio Colao

Thank you very much. I will not go through a long slide; I will just have two closing remarks for you to go away with. One is strong progress on many fronts, I have to say: deployment of sites for Spring 4G coverage, unified communications strategy, real advancement of our strategy on many fronts; and second, signs of commercial improvement quarter on quarter. Again, I want to re-emphasise there’s still a lot of work to do and still the markets are competitive.

Nick and I will attend a number of conferences in September, so we really look forward to meeting you there and then for our results presentation in November. Thank you very much for your questions. Thank you, operator. Enjoy your summer.

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