Vodafone 2006 Annual Report Download - page 36

34 Vodafone Group Plc Annual Report 2006
Operating Results
continued
falling as a proportion of service revenue compared to the previous financial year. These
relative cost reductions were offset by the cost of upgrading customers to 3G handsets,
migrating prepaid customers to contract tariffs and a larger customer base, reflected in a
45.3% increase in net retention costs. Other direct costs increased mainly due to
increased content provision costs resulting from higher usage of the expanded offering
on the Vodafone live! platform.
United Kingdom Years ended 31 March
2006 2005 Change
£m £m %
Revenue(1) 5,048 5,065 (0.3)
Trading results
Voice services 3,642 3,672 (0.8)
Non-voice services
– Messaging 705 684 3.1
– Data 221 142 55.6
Total service revenue 4,568 4,498 1.6
Net other revenue(1) 135 177 (23.7)
Interconnect costs (862) (771) 11.8
Other direct costs (355) (367) (3.3)
Net acquisition costs(1) (380) (388) (2.1)
Net retention costs(1) (395) (391) 1.0
Payroll (391) (403) (3.0)
Other operating expenses (697) (646) 7.9
Purchased licence amortisation (333) (333) –
Depreciation and other amortisation (592) (597) (0.8)
Adjusted operating profit 698 779 (10.4)
Note:
(1) Revenue includes revenue of £345 million (2005: £390 million) which has been excluded from other revenue and
deducted from acquisition and retention costs in the trading results.
Vodafone UK continued to see strong growth in its customer base, without a
corresponding increase in acquisition and retention investment, despite the UK being
one of the most competitive markets in which the Group operates, with mobile
penetration rates in excess of 100%. Enhanced data offerings led to strong growth in
non-messaging data revenue and Vodafone now has over 1 million registered 3G
devices.
Total revenue fell by 0.3%, as a 1.6% increase in service revenue was offset by a fall in
equipment and other revenue. Service revenue grew by 3.2%, excluding the effect of the
September 2004 termination rate cut, benefiting from an increase in average customers
of 7.8%, partially offset by falling ARPU, notwithstanding a rise in usage. New customer
offerings, including Stop the Clock, helped to stimulate a 10.1% increase in total voice
usage, but this was offset by changes in prices during the year to improve
competitiveness in the market, leading to an overall 0.8% decrease in voice revenue,
which grew by 1.2% excluding the effect of the termination rate cut. A continuing focus
on customer retention and an increasing proportion of customers on 18 month
contracts had a positive impact on contract customer churn which fell from 22.7% to
21.5%, although blended churn increased to 32.1%, including the effect of increased
prepaid customer self-upgrades, consistent with market trends.
Non-voice service revenue increased by 12.1%, driven largely by the success of
enhanced data offerings. Growth of 843,000 over the financial year in registered 3G
devices and the continued success of Vodafone Mobile Connect data cards and wireless
push e-mail devices contributed to non-messaging data revenue increasing by 55.6%.
Combined voice and messaging promotions led to an 18.1% increase in total messaging
usage, although this was partially offset by a decline in the average price per message,
and resulted in a 3.1% rise in messaging revenue.
The rise in interconnect costs and the cost of one-off call centre closures, as well as an
increase in Group charges for use of the brand and related trademarks, which
represented approximately 1.1% of service revenue, were partially offset by efficiencies
in overheads and acquisition and retention costs, leading to a fall in adjusted operating
profit of 10.3%. Interconnect costs increased by 11.8%, following an increase in total
usage, combined with an increase in the proportion of voice calls made to customers of
other mobile network operators, as customers optimise cross-network bundled tariffs,
partially offset by the termination rate cut. Despite higher gross additions and upgrades,
especially in the first half of the year, and a higher proportion of 3G connections,
acquisition and retention costs were kept stable with the prior year, mainly due to an
increase in direct sales activity, SIM only promotions and a higher proportion of prepaid
additions with lower subsidies. Payroll was 3% lower than the prior year and other
operating expenses were lower than the prior year, excluding one-off call centre closures
and the increase in Group charges for use of the brand and related trademarks, driven by
the continued benefits of a structured cost reduction plan.
US – Verizon Wireless
Local
Years ended 31 March currency
2006 2005 Change change
£m £m % %
Adjusted operating
profit 1,732 1,354 27.9 23.8
Share of result in
associated
undertaking
Operating profit 2,112 1,683 25.5 21.5
Interest (204) (187) 9.1 5.4
Tax (116) (91) 27.5 22.5
Minority interest (60) (51) 17.6 14.9
1,732 1,354 27.9 23.8
The US mobile telecommunications market has seen continued significant growth in
customer numbers over the last twelve months, with penetration reaching an estimated
72% at 31 March 2006. In this environment, Verizon Wireless continued to increase its
market share and improve its market leading margin performance.
Verizon Wireless outperformed its competitors with record net additions, increasing the
proportionate customer base by 16.6% over the financial year to 23,530,000 and
improving customer market share to approximately 25% whilst also maintaining the
proportion of contract customers at 94.5% of the total customer base at 31 March 2006.
The strong customer performance benefited from continuing improvements in
customer loyalty, with a reduction in blended churn of 2.5 percentage points to 14.7%
compared with the previous financial year, the lowest in the US mobile
telecommunications industry.
In local currency, Verizon Wireless’ revenue increased by 14.9% due to the strong
customer growth, partially offset by a fall in ARPU of 1.9%. The ARPU decline primarily
resulted from an increase in the proportion of family share customers and voice tariff
pricing changes implemented early in 2005, which included increases in the size of
bundled minute plans.
Non-voice service revenue increased by more than 100% compared with the previous
financial year and represented 8.9% of service revenue for the current year. Continued
increases in messaging revenues were augmented by strong growth from data products,
including Verizon Wireless’ consumer broadband multimedia offering, wireless email and
broadband data card service. Verizon Wireless’ next-generation EV-DO network is
currently available to about 150 million people, approximately half the US population.
This investment has paved the way for the launch of innovative new data services in
areas such as full track music downloads and location based services.
In local currency, the Group’s share of Verizon Wireless’ operating profit increased by
21.5%, driven by revenue growth and maintaining a leading cost efficiency position in
the US market. The Group’s share of the tax attributable to Verizon Wireless of £116
million for the year ended 31 March 2006 relates only to the corporate entities held by
the Verizon Wireless partnership. The tax attributable to the Group’s share of the
partnership’s pre-tax profit is included within the Group tax charge.
Vodafone and Verizon Wireless are engaged in a number of joint projects, predominantly
focusing upon bringing global services to their customers. The financial year saw the
introduction of two new data roaming services for Verizon Wireless customers, in
addition to the launch of new handsets for the global phone proposition, all of which
leverage the Vodafone footprint.
Verizon Wireless continued to strengthen its spectrum position with the completion of
the purchase of several key spectrum licences, including licences from Nextwave, Leap
Wireless and Metro PCS and through participation in the FCC’s Auction 58, which took
place in February 2005, with licences being granted in May 2005.