Vodafone Group Public Limited Company (VOD) Earnings Call Transcript & Summary

Good morning, everyone. We performed well across the group in the first quarter, in line with our expectations with good service revenue growth of 5.5%. Most importantly, we are starting to deliver the planned service revenue improvements in Germany, and we have completed our merger in the U.K. at the start of June, launching VodafoneThree, the country's leading mobile operator. I will come back to both Germany and the U.K. shortly. Our other European markets growth has slowed due to competitive pressure in Portugal, but we see good performance continuing across the region. Our emerging market portfolio has delivered strong growth in euro terms. Turkey continues on very well. And in Africa, we have further accelerated our growth across the footprint. So overall, good revenue growth, which delivered good EBITDAaL growth for the quarter of 4.9%. This is in line with our expectations. And today, we are reiterating our growth guidance for both EBITDAaL and cash flow. Combined with our significant buyback program, this guidance delivered strong double-digit free cash flow growth per share for our shareholders. Coming back to Germany. The market has remained very competitive in mobile, but we are seeing tangible results from the actions we have taken. Whilst headline net customer additions are negative; we continue to see improvement on our most valuable customer base. In consumer, our branded contract churn is now single digit, the lowest it's been for the last 4 years, thanks to the ongoing improvement of our customer experience. In fixed, we continue to score well in independent network tests, retaining our leadership position as the best network in the country. As the market penetration has now plateaued, our focus is on driving value, and we have taken proactive actions to increase ARPU for new acquisitions. And we secured a significant win for our brands in time for the '25, '26 football season, as we become the main sponsor of the Borussia Dortmund Club. Now turning to VodafoneThree in the U.K. With the joint venture now operational, we are working to deliver a significant step change in experience for our customers. We are making a fast start to integrate our consumer multi-brand strategies across VodafoneThree, VOXI, SMARTY and Talkmobile, with a particular focus on the net customer losses of the Three brands. We now have the opportunity to make a real impact by transforming network quality and overall experience for all customers. On the network front, we have already seen the first integration benefits. All 3 customers are benefiting from more mid-band spectrum, with up to 40% higher 4G speeds across the country. And we have started integrating our networks to allow all our customers to seamlessly use both Vodafone and the 3 networks across the country. We have also launched a new customer promise called Just Ask Once. Vodafone UK was already leading the industry on the customer service side and this new commitment aims to resolve any query quickly and painlessly, with a dedicated adviser who proactively updates the customer. But of course, this is just the beginning of a multiyear integration. We are well on track with our original financial guidance for the merger in this financial year, and you all know that we expect to deliver at least EUR 700 million of cost and CapEx synergies per annum from the fifth year. Our growth trajectory in the U.K., combined with strong positions in growing markets across Europe, Africa and Turkey as well as improving trends in Germany, give me confidence that we now have the right mix of markets, capabilities and financial capacity to drive good growth over the medium term. Of course, we still have more to do, and our focus will be on continuing to improve our customer experience across Europe and Africa, and further simplifying our internal operations. Luka and I will now be pleased to take your questions.

Thank you, Margherita. [Operator Instructions] Our first question this morning comes from Robert Grindle at Deutsche Numis.

Margherita and Luka. It was good to see the improved service revenue growth trend in Germany, which is approaching stable x the MDU effect. How are you feeling about the prospect for getting back to Germany growth anytime soon? Commercial activity is a bit softer in Q1, however, with broadband net adds going backwards. Please could you say something about what the dynamic is in the market at this point?

Yes. Perhaps I take the financial part. You're absolutely right, ex MDUs, we were almost stable in Q1. The key reasons for that, if I can just take a quick look back is obviously the increase in wholesale revenue contribution, plus 1% quarter-over-quarter. And then also another percent from a better business performance driven by IoT phasing, and also the effect that we had negative one-offs in mobile in Q4, which have not repeated themselves. We're obviously feeling good about the trajectory that we're on in Germany. As we had set at the full year results, we fully expect Germany to be back in service revenue growth territory during the year. So it will come in the coming quarters. Now you will hopefully understand that I'm finding it hard to give you a precise quarterly service revenue guidance for a single market. But the way how to think about the next quarter, obviously is, we will finally lose the MDU impact due to the full lapping that was close to 3% still of a negative impact in Q1. This will be done. At the same time, we will, of course, continue to benefit from the ramp-up of the one-on-one agreement to full scale that we expect to reach in the second half of the year. So those are positives. Against that, as I said, in Q1, we had a positive phasing impact in our B2B business in IoT that is not expected to recur in Q2. And we, of course, also need to take into account the -- I would say, long-term trend of TV headwinds that we are facing in outside of the MDUs as well as the competitive environment in mobile. But this all being said, I think the momentum is clearly so strong that it will carry us back to growth during the year, while we also expect to see a gradually improving trend on the profitability front in Germany.

Maybe I take Robert, the commercial performance side. I would say, different sets of circumstances across mobile and fixed. Starting with mobile, no particular changes to the pricing environment since May, as you know. So the market remains very competitive. But I need to say, as I anticipated in my introduction that we look positively on our results in the quarter because, as you know, we care about value versus volumes. And if I look at what has happened in the last quarter, and I would say in the last few periods overall, the branded base, which is what we mostly care about because it's where our value stands has improved in the last year has grown, and its churn levels have consistently decreased. We have just recorded single-digit churn, and this is for the first time in the last 4 years on the branded base. And this is on the back, I would say, of two things. First of all, our customer experience step up. We did say in May, we had the best ever NPS in mobile as well as in fixed. And also, you see the type of propositions that we are building around our branded base beyond the sort of front books permissions. Our focus is on creating value on that base, which is why you have seen us introducing handset financing with contracts for up to 3 years, working on family cards at the high end of the market for up-selling. So we are pleased with the trends there. Obviously, the net adds were negative and they were negative, however, because we continue to downsize the Reseller segment in consumer, which is, as you would expect, very low ARPU and low margin. And also, we had some negative low ARPU large contracts in B2B. So overall, good progress, different situation in fixed. In fixed, there was a change in the market environment. I mentioned already in May that the penetration of fixed has really plateaued in Germany, so there isn't much market growth. And in these circumstances on the back of the fact that also our churn has kept improving in that space. We have started to work on the front-book value early in Q1. And this has taken various shapes of a number of interventions, pricing in DSL, reduction of -- taking out the CableMax promo in cable, also reduction of some starting credits, reduction of commissions in indirect as well. Inevitably, all these had some admittedly, I would say, looking at the numbers more impact on the growth acquisitions. But we have seen some positive signs in the market overall, I was mentioning this because, for example, in July, our main competitor has also reduced promotions in DSL, so that's where we are on both segments. And I need to say standing back from all these results, I said in May that we had done some structural changes in Germany. We have seen the step-up in customer experience with the best ever NPS. We are now seeing the impacts on churn. And I think we have all the ingredients in play in Germany, whether we are talking about the teams, the level of investments now to really make the most of our position in the market, and we look forward, of course, to the return to growth that Luka was mentioning.

Your next question this morning comes from Maurice Patrick at Barclays.

Yes. Hopefully, you can hear me, and see me, okay. If I could please just dive into the U.K. trends. I mean, in the U.K., you showed a slowdown from about 3% to about 1%. You cite in the prepared remarks, something around the business project milestones. But if I understand correctly, the service revenue growth trends now include Three UK. So you've probably got a month in the 1Q numbers. You've changed the group guidance. If I look at the net adds on the contract side, you lost 46,000. So curious to understand that 46,000 contract net adds or net losses, was that the Hutch base? Was that the Vodafone core branded base? When we think about the full inclusion for 2Q, is that going to give -- is that going to mean that we get a continued slowdown or maybe we should expect to see a recovery in the service revenues throughout the rest of the year?

Thanks for the questions. So I'll perhaps cover the financial part and then when it comes to what we are seeing from an overarching more market momentum perspective, perhaps Margherita can attend to that. First of all, not sure that I understood it correctly. So we have not changed company guidance around the U.K. In fact, the trends that we have been seeing in Q1 are exactly in line with the expectations. And I believe also with what I flagged already at our full year earnings, where I said that we expect headwinds and a slowdown in the U.K. as a consequence of 2 factors. On the top line, I have to qualify, because in EBITDA, we continue to expect good growth from the U.K. But on the top line, I already flagged that we are seeing losses of some legacy managed services contracts in B2B that came with a very low margin, and they result in the step down in our B2B revenues that you will have noted where we had a negative 3% growth in the quarter, whereas consumer obviously continued to grow. So that's the first thing. On the Three UK side, you are correct. We have 1 month of Three UK numbers in and also entirely as expected and as I flagged before, Three UK has been on a downward trend in terms of their growth rates for a while. In fact, in the first month of us consolidating their results, this growth has now turned slightly negative. And the reason for that is essentially that they have seen customer losses on their first brand for a while. This has been substituted by SMARTY ads, which in our reporting show up in prepaid and not in contract anymore. And obviously, they come with a lower ARPU, as you will imagine, and that is resulting in a step down. From a trend perspective, because you have asked that question, as a result of this managed services step down in B2B remaining in the numbers now for the remainder of the year, it will not worsen any further, but will obviously continue to affect it. And the growth that we see in other parts like digital services in the U.K. as elsewhere will not fully compensate for that as well as the fact that we see these trends in Three UK continuing for a while before the whole positive effect of the merger will then take hold. And will improve the performance again, we would expect for the next few quarters a slightly negative growth contribution from the U.K., which then will unwind as we go into the next year.

Okay.

On the customer side of things, Maurice, I would say, the negative net adds in the quarter, as you may have seen from our press release, half of them was phasing of B2B contract. Half of them was this Three brand performance that Luka was mentioning, which is not new. And I need to say beyond the sort of short-term puts and takes of the financial performance. I think it's important to share the impact on these numbers and our top line performance that the integration is going to have because it's going to be quite significant. You will have noticed from the actual log that the team has hit the ground running. And it's fair to say that for the last 2 years, we knew about the potential of what we could be doing. And therefore, we have had the time to prepare. And I just mentioned maybe 3 examples of areas that specifically will impact the performance of the 3 customer base going forward coming from the integration. I'd say, number one, the changes to the network. The 3 brands has a much higher churn than the Vodafone brand. And the #1 reason of this churn is network quality. You will have heard in my introduction and read in the papers that actually the performance of the network that the 3 customers are experiencing already today, I would say, for the last month or so, has changed. With spectrum sharing, we have improved the 4G speeds of up to 40% across the U.K. But most importantly, we are bringing the 2 networks together. And by allowing this to happen already this year, we will have a drastic reduction of not spots for all our 28 million customers, including the 3 customers that will be able to use what today is the -- was the Vodafone network. It's a very significant reduction. We are talking about 16,500 of square kilometers. So it will be visible in the U.K. and will ramp up throughout the year. And more broadly, obviously, we're investing EUR 1.5 billion in the network. So definitely something that will impact this churn. Still on churn, second action is we are now bringing our market-leading CX, customer experience approach to the 3 base, and you've heard me mentioning before this new initiative that we are launching with Vodafone UK, we were always at the forefront of the industry now on customer service. And finally, convergence, and this will impact revenues. We have already opened the sale of fixed broadband products from Vodafone to the Three UK base. We are the fastest-growing broadband provider in the U.K. with our largest fiber footprint of any other operator, over 20 million households. And now the Three UK customers will access this, we are marketing directly to them. So all this will impact net adds and will impact revenues going forward. And I need to say as we have said many times before, this merger is really a fantastic opportunity for us to drive revenue across all segments. So the integration is starting with good EBITDA growth this year and ramp-up of EBITDA and free cash flow growth throughout the plan, as we have already discussed in the past.

The next question this morning comes from Carl Murdock-Smith at Citigroup.

I wanted to ask about Other Europe and the outlook for service revenue trends there, specifically in kind of Portugal and in Greece. In Portugal, we've seen a step down in trends this quarter. Obviously, you've got the impact of Digi there. And I think we've just lapped the price increase from last year. So I guess my question there is, is that step down? Is that kind of onetime as we lap that? And then what's the outlook going forward? And will there be any further deterioration or is that just a onetime move? And then in Greece, last quarter, we obviously had the tough comp in the prior year in relation to public sector revenues. So I was maybe expecting more of a bounce back this quarter in terms of the trends there. So just a comment around the performance there and the outlook going forward as well? And regarding other Europe in general.

Yes. Maybe I start just in terms of the news from Portugal and Luka can complement with the expectations on service revenue and EBITDA growth in Other Europe as a whole. I'd say no real surprises in Portugal. So the situation with the entrants of Digi was the one we were expecting, as we discussed in the past in terms of price points. Vodafone Portugal in this context is, I need to say, competing very well. You may have seen that the impact on port-outs and customer number is small and not evolving over time. And this is a factor of the fact that we have a strong position in Portugal both on general loyalty and customer experience, but also on TV specifically because TV is quite central to the offers in the market and our customer experience telco. So I would say volumes are okay, but we had an impact on ARPU. You mentioned the lapping of the price increases, but more broadly, ARPUs have been under pressure in the market because of retention actions because of the growth of second brands. And in terms of trend line, you should expect this to continue. Now in the numbers that -- or the outlook that Luka will share, you should consider, though, 2 elements of mitigation. So the consumer pressure is expected to continue. On the other hand, we have 1/3 of the revenues in B2B, which is performing quite well in Portugal. And also, if you move at EBITDA level, we have a range of, I would say, mitigations that can be put in place in terms of trend lines.

And in terms of what that means for the Europe, we fully expect that service revenue growth at the regional level will remain in growth territory for the year, in particular, we expect a better performance in the second half year, actually, as we expect that, in particular, in B2B, the growth trends will accelerate in the second half year. Greece because you have mentioned that will be actually part of that story with an expected much stronger second half performance also partly driven by what you outlined before. And from an EBITDA perspective, we also continue to expect a good performance and contribution from Other Europe for our full year results. So from that perspective, we have a lot of very well-performing markets there. And in Portugal, we have the resilience of our strong convergent position plus the strength in B2B that will actually balance things out despite the consumer pressure.

The next question comes from Andrew Lee at Goldman Sachs.

I was just going to bring us back to Germany. One of the things that investors are getting excited about and companies to an extent to is the scope for in-market consolidation. I think I'm right in saying that you still can't yet commit to German top line growth without the boost from 1&1 over the next 2 years, which is obviously a meaningful lag versus some of the growth that other countries are posting now already and could do post consolidation. It would be good just to clarify that. But the question is, is German consolidation, something that you could actively lead on in any scenario? Or do you see yourselves more likely an indirect beneficiary if German consolidation were to happen.

Thank you, Andrew. I need to say for the underlying growth point. It will very much depend -- you started from -- it will very much depend really on the competitive conditions in the market, particularly in mobile. So what we said previously is if conditions remain as they are today, this is unlikely to happen this year. But of course, we will have to see. Specifically on consolidation in Germany. Obviously, there is a flurry of speculation at the moment around consolidation all across Europe. And I need to say, I could discuss extensively why that's important, as you know, and why we are pushing regulators for a change in the merger guidelines there and bringing the U.K. example to the fore. I think it's really an important step. But specifically for us in Germany, our focus is on completing our turnaround. Our focus is growing in Germany on the back of increased operational excellence and all the elements I was talking about before, structural strong customer experience, structural strong position of the brand in the market. That's really what we are focusing our efforts on. And as far as 1&1 is concerned, our focus is -- I mean, after 2 years, yes, since we first concluded the agreement on wholesale is now on completing our transition and making sure that 1&1 can now benefit from our overall network nationwide. That's what we are focused on. I'd say this is true more broadly, by the way, beyond Germany. I mean on consolidation; you have seen us in the last 2 years really taking the matter in our own hands. And therefore, really, it's all about operational excellence now.

The next question this morning comes from James Ratzer at New Street.

So just a broader question, please, around your technology road map in Germany, especially on the cable infrastructure. I mean if I look at your cable partnership in the Netherlands with Liberty Global, they've announced they're going to be stepping up their speed to 2 to 4 gigabits per second with DOCSIS 4 coming in by end 2026, going to 8 gigabits per second. I think in Germany at the moment on cable, your maximum speed is 1-gigabit. I'd just love to hear your latest thinking on the kind of technology path ahead for your cable infrastructure. And as we're discussing it, I see in the release you mentioned OXG passed 100,000 homes this quarter. Could you give us an update just there on what's the total number they've passed and how many subscribers you now have on the OXG network?

Well, maybe I start with OXG. The pace is accelerating. We are now at 230,000 home passed. As you mentioned, the current run rate is 100,000 households per quarter, more or less and of course, we are working to build on that further acceleration. So by the year-end, we will be some way above the 0.5 million home passed. We are building across 31 cities. We have engaged 30 construction companies, and the orders out are already for 2.5 million households. So now progressing well. I need to say, we are pleased with the execution. It's early days for the commercial side. So we are in testing now, and we will go commercial in the second half of the year, and so we will start sharing customer numbers with you once it will become material. But certainly, a good direction of travel there. More broadly in terms of technology road map for Germany. And as you know, each market has its own very different conditions. Our starting point of any strategy, which is typically a layer of actions over time is what customers want, what customers need. In Germany, the majority of the customer is still on speed of under 250-megabit per second. And in the context of Germany, what we want to make sure is we serve as many customers as we can weigh the gigabit speed, which, by the way, is as far as any, I would say, consumer application idea has gone so far. So more than sufficient to solve all customer needs. We are today retailing the largest footprint, and this is the same as actually in the U.K. of gigabit speed in Germany, and we do so by combining the 25 million cable households with an additional 5 million of wholesale households in fiber. So today, 3 out of 4 of German households can buy gigabit products from us. What's next? So on top of the OXG evolution that will continue to run according to its plans for the MDUs in particular. We continue to fiberize at pace the cable network. And you know the drill there. We are adding fiber segments. And on the back of that, we deliver a very good experience for our customers. And we see fiber advancing, I would say, organically within the network. I was mentioning earlier that we continue to be rated as the best network in the country across all technologies in terms of speed and in terms of reliability, and this is a testimony of this investment plan. And then selectively, what we are introducing in terms of the cable sequence in Germany is, high split, which is a technology that can also help with the speeds particularly in enhancing the uplink speeds. In the end, it's what I would describe as a multiyear technology pathway, which we think is definitely appropriate for what our customers need in Germany and really pleased once again with customer satisfaction there as well as the churn levels. Actually, just a small point on this. We talk about churn reducing in fixed broadband in Germany for some time. I was actually looking at this recently. And it's now not just below other big markets like the U.K., but it's now effectively below most of our European markets. So good position in fixed broadband there with our customers.

Does that mean then the kind of just on the cable network, your -- the 1-gigabit maximum speed is likely to probably just remain in place for the next few years. There aren't imminent plans for headline speed increase.

High split has an impact on that. It has impact on uplink and downlink. It will depend on the areas. But in terms of the multi-gig story, keep in mind that even the gigabit products in Germany is still held by a very small minority of customers. So not only it doesn't have use cases, but it's really not on the radar, what people are optimizing, which by the way, is also true in the Netherlands is the combination of price and quality. So we are upgrading them to 1-gigabit, and it will take some time to get there.

I just upgraded to 1-gigabit. So at least one additional customer on gigabit speed now.

Next question this morning comes from Paul Sidney at Berenberg.

Yes. I just had one question on Germany, but perhaps a little bit of read across -- potential read across for the U.K. But my question is, we've heard many times from the Vodafone team over the course of the morning, the phrase, value over volume, particularly when talking about the German market, it's a narrative we've heard from Deutsche Tel pretty consistently over the past 6 months. So I'm sure it's not a coincidence that you're focusing on that volume -- sorry, value over volume strategy. So just wondering if that's really intentional. And is it meant to send a message to the other German operators that there is an opportunity to extract more value from the German market and is this a strategy that you'll be following in the U.K. following the completion of the Three UK merger?

Thank you, Paul. I'd say it's very much -- from my perspective, it's a very much needed sentence when we talk about particularly mobile net adds because as you know very well, whilst in broadband, acquisitions come with ARPU. And therefore, I think it's logical that in the roundings, you look at this as a leading indicator of future revenue. This is absolutely not the case in mobile. And it's not been the case for many, many years because in the context of the SIM count in mobile, there is a wide range of different values, we've even had markets historically where at some point, people were distributing free SIMs, yes. So I don't think the SIM count is for the industry, a good KPI of a good leading indicator of revenue. And I think it can end up being also to the extreme, very confusing red herring because it drives people towards the wrong behaviors. Sorry, I went a bit long, but I'm really passionate about this point because a lot is made out of that, whilst ultimately, what we care about is obviously revenue, which is why in the specific of Germany, now you were asking about Germany, our focus has to be not a number of SIMs, but as to be we have a valuable base for us, we use this word branded base as opposed to reseller base because this is where effectively the value is entirely, and that's what we are targeting.

And sorry, just the sort of second part of the question in terms of is that a strategy you'll be looking to follow in the U.K. and trying, again, get the whole market to focus on value rather than these quarterly KPI numbers?

Historically, it has to be the right approach anywhere in mobile for everyone.

Absolutely. Appreciate the answer.