Vodafone Group Plc

Good morning everyone and thank you for joining us for our third quarter update. Before discussing our trading, I'd like to highlight the progress we've made against our priorities, customers, simplicity and growth. When I became CEO last year, I said that Vodafone must change and we are. We are changing where we focus our time and effort towards our customers. We are changing where we choose to operate to deliver good and reliable growth. In customers, NPS and the Tractor scores are both moving in the right direction across our markets, with the UK reaching the number one position for NPS in the market for what is probably the first time ever in our history. Following our reprioritization of investments and focus on excellence across our customer operations, we are simplifying our processes, significantly reducing call waiting times and improving the tools available to our care agents across our markets. In Vodafone business, we accelerated our growth to 5% in the quarter, with particularly strong growth in digital services and in our market leading IoT business. In January, we also announced a unique strategic partnership with Microsoft. Together, we will drive a step up of our growth potential in the SMB segment and with IoT. In Africa, a particular highlight is the growth of financial services in Egypt, with the number of customers increasing over 55% to 7.5 million benefiting from Vodacom's capabilities. As part of being a simpler business, we have already completed over a third of our 20-year 11,000 role reductions. In parallel, we continue to work on route sizing our portfolio. We are progressing with approvals for our sale of Spain and the UK merger. We have also been actively exploring options for Vodafone Italy for some time. We are continuing to progress on this and, as we have done in Spain and the UK, we will focus on the most value creating and deliverable outcome for our shareholders. But, as you would expect, given that we are engaged in constructive discussions, I'm not going to comment further on this today. Turning to our Q3 trading, I'm pleased to report that we have sustained good group service revenue growth into Q3, with 14 out of 17 markets growing and we are reiterating our financial guidance for the year. In our largest market, Germany's service revenue was in line with our expectations, commercial momentum in both fixed and mobile improved and the execution of the housing association transition has now started with all processes performing according to plan. And with that, Luca and I are looking forward to your questions.

Thank you, Margherita. As a reminder, please only one question per analyst, so we have time to hear from as many of you as possible today. Our first question comes from Emmett Kelly. Emmett, please unmute yourself. Your line is open.

Yes, good morning everybody and thank you for taking my question. My question, please, is on the deregulation of the German MDU cable TV market. On the last call, you kindly provided us with some numbers for the potential revenue at risk and you gave us a range of retention rates. I know it's very, very early days, but could you please say a few words on how we could think about the phasing of the MDU revenue at risk? Is it more front-end loaded or would it be straight line over a number of years or perhaps a different pattern? Thank you very much.

Thank you, Emmett. I'll let Luca maybe say a few words on the revenue profile. In terms of what we are actually seeing in the market, as you know, we were expecting volumes to start becoming material in January and it's happening. We are tracking this very closely. As I mentioned earlier, we are pleased to see that all our systems, all our processes are performing as expected and also we are seeing good performance across the full range of our channels from digital online, retail, telesales, -to-door. Actually, Luca, you may want to add a word on -to-door because Luca has been one of our -to-door salesmen recently on the ground. This week, you will find that we are starting an above the line campaign on TV in Germany because what's starting now is all the marketing actions to nudge our customers to take action The trends so far, we'll come to the phasing in a second, are certainly supportive of the range of outcomes that we have seen in the trials. It's only a few weeks and I think this is really important because only a few weeks into what is the first wave means that it takes time for customers to migrate. I think we will give you a much fuller update when we come back in May. But Luca, on the revenue trends and how it's going to impact our profiles?

First of all, on my experience perhaps in -to-door sales because I think that was for me very insightful. Of course, I was only able to visit some 20 customers or so, but I would say in an MDU that is quite representative of the customer base that we are tackling with the program. You typically get to a combination of a good initial sign up and then a range of people who are just trying to get informed and then make their choice. Therefore, as we work through the processes, it will take a few months actually until the summer until we are fully through it. What I could definitely see is that this is not necessarily a customer base that is very OTT heavy in nature. Typically, we are talking about more older people and a certain predisposition for staying with the status quo, which I would say is quite constructive. Therefore, I think we will probably land within the guardrails that we have outlined so far. In terms of the phasing, we are now going to see in Q4 the first significant impact. We expect this to then through into the first half year of FY25. The impact of course, regardless of where we end up in the range, will be quite sizable. Still, my current expectation is that we will land in Q4 in Germany at roughly flatish service revenue growth because the decline through the MDUs will be counted through a positive step up mainly in our Rota 4 business segment in Germany. That will be close to a wash in that respect. As we go into the next year, of course, in the first half year, the MDU impact will mean that we are going to see a return to negative growth. In the second half year, though, this will start to be moderated by the pick up of national roaming agreement with one and one, which will start to bring us some incremental service revenues. That will then come to full fruition. In FY26, I fully expect Germany to be back to a very decent growth.

Thank you very much.

Thank you, Ahmed. Our next question comes from Carl Murdoch-Smith at Börenberg. Carl, please unmute yourself and go ahead.

That's great. Thank you very much. I wanted to ask about the outlook for the growth in Vodafone business, please. The strength of Vodafone business in Q3 was supported by the UK and Italy while Germany saw decline. How sustainable is that growth in the UK and Italy? How much of the growth in the UK is due to the smart metering program? Is that revenue ongoing or one-off project based in nature? In Italy, how much do business growth slow in Q4 now that the voucher program has concluded? Then in Germany, I think you just slightly touched on it there, but can you talk about this quarter's decline and what your growth expectations are going forward, both organically and also with the new Microsoft agreements as well? Thank you.

Carl, I'll hand over to Luca to give you all details, but let me just mention the headline. What you should expect for Vodafone business across the board is continued acceleration going forward. It's simple, but maybe Luca, you can bring a bit more color.

Absolutely. I fully expect this acceleration also to show in Q4 at the aggregate level. As you said, the growth composition will be slightly different. In Vodafone Germany, we absolutely expect a bounce back to growth. Germany is in general an IoT heavy market due to a strong focus on manufacturing and automotive industries. Q3 actually was a seasonality impact because last year we had a very strong activation in a particular customer project there. This will actually now turn around in Q4. We will have a strong contribution from that part of the business and hence a return to growth in Germany. As opposed to that, in both the UK and Italy, while I would continue to see very decent growth, the growth rate should start to slightly come down also due to facing impacts from individual projects. However, the rest of the business in particular and the other European countries should continue to accelerate. Then going into next year based on the strength that we have gained through the expanded partnership with Microsoft, the joint investments that we are doing into the -to-market capabilities, I would expect that we're not seeing the end of the growth opportunities, but actually a further opportunity for acceleration.

Yes, and if I may do a small build on this, you know that scaling up Vodafone Business was one of the key strategic opportunities that I identified from the beginning. I'm very positive on it. It's happening. The demand is very strong. It's really on us to equip ourselves to better serve it, which is why you have seen, for example, that my first big business partnership has been with Microsoft precisely because it fits very well with this objective. I'm really keen to leverage partnerships to ensure that we build on our strength, bringing in also external capabilities to just accelerate our growth.

That's great. Thank you very much.

Thank you, Carl.

Thank you, Carl. Our next question today comes from Robert Grindle at Deutsche Bank. Robert, please unmute yourself. You're in the room.

Yeah, good morning. Thank you. My question is around mobile data traffic growth. It seems to be finding a floor around the high teens, 20s mark. At least there wasn't a further slowdown in Europe this quarter. It wasn't long ago. You were at twice, three times this level. How are you thinking about mobile traffic for CAPEX and network planning purposes, please? Are we now in a sort of steady state? Thanks.

Luca is actually conducting CAPEX location reviews as we start our long-range planning process for the coming years. So maybe you want that?

Yeah, that view is basically the same as I shared already at the half-year mark. Of course, we're looking into those trends as well. And as I had shared at our half-year earnings already, my conclusion from what I'm seeing at the moment is that we are well served with the current levels of capital intensity. And certainly, they don't suggest the need for a step up in investment. So steady state in that respect.

More broadly, one point that is important to me when I look at traffic dynamics is what I call responsible usage. You know, we have been engaging in discussion with the -the-top players on the dynamics of the usage that is pushed through our networks. I think it's really important, not just for us and our CAPEX, but for the planet, really more broadly in terms of energy consumption, network build out, that this traffic is managed responsibly with a common incentive of giving our customers what they need, but not pushing through more than what the customers actually want and experience, which has been the case for some time. So I think that is also something that we can proactively improve.

Thank you, Robert. Our next question comes from Andrew Lee. Andrew Lee at Goldman Sachs. If you could unmute yourself, please go ahead.

Yeah, good morning, Margarita and Luca. I had just a question around the German growth again. So obviously, we've already discussed in this call the extreme impacts from the cable TV regulation, and you've laid out that there's some amazing impacts from B2B in the quarter. But can we just look at the underlying growth? Because obviously, for many investors, it's 30 bits, and whether it's 30 bits or 50 bits, it's still a relatively low number and, you know, and I guess, the man takes to an extent. So what people are really trying to understand is the trajectory of underlying growth. I wonder if you'd just give us a kind of spot check on how you see that kind of acceleration or trend going? And should we expect a continued acceleration as we look at kind of X cable TV headwind disclosure into FY25? Kind of any updates on the commerciality? That would be great. Thank you.

Thank you, Andrew. And I think this is actually a really important question. We are going from the next quarter as the TV low impacts are becoming material to publish underlying. But it is really what we are all watching. And yes, we should expect from now on, starting in Q4 and into FY25, a continued acceleration of the underlying service revenue growth in Germany. And the reason why is fairly simple. If you think about it, as of February today, we have finally put behind us the price driven churn that we were experiencing in fixed broadband. We will have had one month of the final disconnection of the final cohort happening in January, but from February onwards, that won't be the case anymore. If you look at how we are playing in the market, and I think our commercial performance is starting to highlight that, we have a full range now of simple propositions for our customers, from mobile to fixed convergence, family plans, TV and fixed broadband bundles, you name it, we are there. And these offers are being supported as tests continue to demonstrate by strong performance in our networks, both fixed and mobile. So on the back of these trends, and the changes that we are seeing in our operations, if you set aside the TV transition that we have talked about earlier, you should expect a continued underlying acceleration, starting from the next quarter.

And just as a quick build, don't forget about Vodafone Business in Germany. That will definitely add to the growth profile. What you've seen here in Q3 is certainly an anomaly, and business will also next year add positively to growth in Germany. And then last but not least, of course, in the second half year, you add to that the positive impact from the national roaming agreement with Eins and Eins. And then you can see clearly that FY26, once we have the MDU transition out of the way in particular, will be a very pleasing picture for Germany. Thank you.

Thank you, Andrew. The next question this morning comes from Jacob Bluestone at Xaine. Jacob, please go ahead.

Thanks. Thanks for taking my question. Just getting back to the B2B revenue growth acceleration that you've talked about, I'd be interested if you could just talk a little bit about the sort of margin mix, or margin of the revenue mix from that. Are these similar margin revenue streams to consumer, or when you refer in your slides to things like cloud and various other security services, are these lower margin revenue streams? Just when we think about how to think about that revenue acceleration feeding into EBITDA growth later in the year? Thank you.

Perhaps I can take this as well. The answer is it depends, because in Vodafone business, we have a broad portfolio. We have the classic connectivity products with a very similar margin profile to consumer. And then we have the beyond connectivity products, so in particular, the cloud and IoT solutions. There, we have a negative margin differential to the connectivity products. It's not huge at the Vodafone business aggregate level. We're talking about a couple of percentage points, but what is more important is actually that this part of the business has a very low capital intensity requirement. And therefore, in terms of what it actually yields in terms of cash flows, and that is ultimately what matters most, is actually very positive. And of course, the growth profiles of a very different nature as well. In cloud and in IoT, we're growing in the 20s in the connectivity world, of course, rather in the low to maximum, mid-single digits. And therefore, in terms of the actual returns from a cash perspective, this business is super creative to Vodafone.

Thank you.

Thank you. Our next question comes from Akhil Dattani at J.P. Morgan. Akhil, please go ahead.

Hi, morning. Thanks for taking the question. I just had a question on shareholder returns. You've spoken in the past around the fact that as the portfolio at Vodafone changes, that can have an impact on how you think about shareholder returns. And in the last quarter, you've talked about possibilities around both the dividend and buyback. I guess what I was hoping to understand is two things. One is you're currently in negotiations in Italy, and obviously there's limits on what you'll say there, but that could materially change the portfolio. So I wondered if we should expect by May, you'll be in a position to have enough visibility as to how you might want to reshape your shareholder remuneration policy, given obviously uncertainties around whether Italy closes by then, sorry, is announced by then. And even if it is, there's obviously a timeline to get that deal in the UK closed. And then the second bit is just to understand, irrespective of that, could you just really update us on the general building blocks in terms of how we should think about shareholder returns? The first is there are certain debates around the coverage of your dividend, but equally, Luca, I think you've mentioned buybacks as an option. So just if you could help us square quite housing by these topics. Thanks a lot.

Thanks, Achille. I'll cover the timing and then ask Luca to comment on how we see the building blocks. On the timing front, we said back in November that we will review our capital allocation overall once the Spanish deal closes. And we continue to target for that, Alfjuan of this calendar year. We're still going through some approvals, nothing onerous, but as always, it can take some time. And therefore, you should expect us, as you mentioned, to update you on capital allocation within our May results. In the way we think about it, Luca?

I can only reiterate what we already covered at H1 earnings. First of all, of course, we are very focused on generating capital. That's the whole focus on operational excellence. I'm certainly looking into all of the components of our -to-end cash conversion chain. And I think over time, I'm sure we will have further opportunities with the customer simplicity growth focus to also improve there. But then more importantly, in the short term, in terms of the capital allocation, we have covered briefly already on one of the previous questions, the question around capital intensity. So nothing that would suggest any need for any changes in that respect. In terms of the balance sheet, I'm pleased that I was handed a very solid and strong one, actually, with very long-term debt at reasonable interest rates. Also in that respect, there's no significant shift that anybody would need to expect. And then in terms of the actual shareholder returns, yes, I am convinced that we have to look at a good mix of different means on the dividend front. It is important to me to make sure that an ongoing dividend is covered by the underlying free cash flow of the firm. Spain is going to change that a bit, but we will use all of the right call. Nothing is decided. And yes, also share buybacks could then be part of the mix, in particular, if we have sizable cash inflows like the one that we are expecting from Spain at the closing of that transaction.

Can I just clarify one thing, Margrito, on your first answer? Does that mean that Italy, in terms of whether it happens or not, the construct of any potential deal doesn't necessarily impact? Because I guess it's quite a big asset for you. So I'm just trying to understand how you can give clarity in May, if potentially that deal hasn't yet materialised by that point.

Our intention remains to give clarity in May. As you can imagine, we will have the 4 billion proceeds from Spain coming in, and therefore we don't think we should delay any further. So we will update you in May.

That's clear. Thank you.

Thank you. The next question comes from Georges Ierodiakono from Citigroup.

Georges, please go ahead. Good morning and thank you for taking my question. It's just a further clarification about Germany. You mentioned B2B being a tailwind from next quarter, and that the NRA at some point will contribute positively. But I'm just trying to understand the impact on the broadband service revenue growth from the losses you accumulated in the last few quarters. And I'm just curious, how will that be mitigated? Are there more price actions you can take like last year in order to improve our point broadband, or is it a KPI recovery momentum? And then just a clarification also on the NRA, because I don't think it's been finalized yet. Just curious as to when we should expect the agreement to be finalized and therefore start to contribute. Thank you.

Sure. Maybe Luca, you take the timing of the contribution of the -on-one deal. In terms of broadband profile, as we said, from a KPI's perspective, we will have the losses accumulated so far and one more impact from the month of January to close the effect of the price increases that we've had over 70% of the base. Beyond this, the price increases which we have in the back of us, let's say at this stage, will continue to support growth for a part of the year in FY25, because as you know, we faced them throughout FY24. As far as pricing is concerned, I'd say it's too early to prejudge the moves of FY25. Of course, we will have to assess the market dynamics, but I wouldn't prejudge anything in that space. And beyond this, obviously pricing is just one lever of what we see. And as I mentioned earlier, we have good KPI's trends. We have good offers on the market supported by good networks. So we see really the overall underlying growth in Germany picking up.

Yeah. In terms of the -on-one contract, just to be very clear, we have agreed on binding heads of terms already a long time ago. What we're currently working through is the schedules of the long-form agreement, and that shouldn't take too long to finalize. But it is, as you will appreciate from a more tech requirements perspective, quite detailed and precise. And that's why we are close to finalizing it, but not yet fully final. But the heads of terms are binding. And then from a go-live perspective, so to say, it's still the same assumption. We are going to see positive impact on the revenue and EBITDA front from the second half year, because we're supposed to start the onboarding basically after the summer period. And then from a cash flow perspective, because we have this year to still invest a bit from a capex perspective into the onboarding, we are seeing a positive contribution from a cash flow perspective, and we're starting in FY26.

Thank you.

Thank you. The next question comes from James Ratzer at New Street Research. James, please go ahead.

Yes. Good morning, Marguerite and Luca. Thank you for taking the question. So you've mentioned a couple of times on the call so far the Microsoft deal, and would like to dig into that in a little more detail if we can, specifically from the cost perspective and the impact it will have on your business. So firstly, just from a data center perspective, I think Vodafone has, you say, access to about 800,000 square meters of data center space. How much of that is actually owned directly by you? And as a result of the Microsoft deal, is there an opportunity for you to sell data centers and potentially unlock value here? And similarly, is there a mix shift that's going to happen between capex and opex as a result of this transaction? Are you moving to higher lease costs with Microsoft, but potentially lower direct capex? Just being sure to understand how should think about the impact of this partnership given it seems so significant. Thank you.

Yeah, perhaps I can answer that because your questions were more focused on the financial aspects. But I think we are missing out, of course, with the focus on data centers, a big, significant positive impact in all of the other pillars of the partnership because the co-investments and the support that we are getting from Microsoft on the B2B go to market front, on the IoT front, of course, is very value-accretive for Vodafone as well. But if we are looking at the data center front only, first of all, our existing data centers, the vast majority of them are leased and not owned. So that is something that you need to take into account. We are nevertheless expecting actually a significant net benefit from moving to Azure in those data centers. We have calculated an NPV that is in a triple-digit million range, and it comes from essentially significant cost synergies. It will result in a very small capex to opex shift on the opex front. Yes, of course, there will be opex that will be consumed through the utilization of the Azure platform, but it will be countered by other opex savings due to the efficiency that we are generating in operating our systems and applications, cleaning up as well, and managing the upgrade cycle in a more efficient way on the Azure platform. So don't think about it as a dramatic shift between capex and opex. We are talking about double-digit millions over the 10-year timeframe. All of those impacts and also the corresponding investment has been fully considered in our long-range plan. So it resides essentially in a shift between internal expenses and taking them to our partnership.

A triple-digit million euro NPV is quite significant. That's coming from getting lower costs with Azure than with your existing data center providers.

And our own operations. So it's really a combination. We are moving 10,000s of servers to Azure, and all of them, and the legacy apps on top of them actually have quite a significant maintenance burden placed on them. And by moving them to a modern public cloud infrastructure, we can gain leverage and efficiencies there.

Great. Thank you very much indeed.

Thank you. The next question this morning comes from Polu Tang at UBS. Polu, please unmute yourself.

Hi. Thanks for taking the question. I have one question about Eti Salat. Can you clarify when they will take their seat on the Vodafone board? And are there any further steps that need to be taken before this happens? Separately, have they given you any feedback on where they would like to see the dividend and shareholder returns? Thanks.

On the timelines, we are still going through the process. And as Vodafone, we are of course supporting the process with whatever information sharing that is required by the various authorities, but it still needs to be completed. And therefore, we will update you. We look forward to welcome Hatem on the board. And at that point, having a fuller conversation around the topics you mentioned, I think it would be really helpful to be able to have these conversations once they join the board.

Thank you, Polu. We have time for one last question this morning from Maurice Patrick at Barclays. Maurice, please go ahead.

Yeah, morning, guys. Thanks for taking the question. If I could ask a slightly dry one around the central cost function, please. You spend about 800 million euros or so in the central cost function, which you allocate to the operating companies. And given the UK daily announced and Spain, there's been some discussion around the extent to which those charges are above the line and below the line and how much that cost can be flexed going forward. So the question really is, as you do simplify the group structure, i.e. sell Spain, do something in Italy, to what extent can that central function cost be flexed down with fewer opcos or is it more fixed? There's a more color and that would be very helpful. Thank you.

Yes, in a nutshell, the 800 million you are referring to are actually the capex that are being spent on behalf of the markets in areas such as the common data centers that Luca was just describing. So the capex are held in the center because that's where they are spent. We have a single data centers infrastructure, but actually we then have the depreciation impacting the markets over time as the capex get get depreciated. So these are, I would say, a sort of simple distribution mechanism. But more broadly, the costs that actually we spend today for the whole op-ex of the shared operations are sitting firmly within what you see in terms of market P&Ls and we are transforming how we run our shared operations precisely because we want to inject more flexibility. You have heard me say, I think back in May, that we are moving towards a commercial shared operation setup. What do we mean by commercial? It means that with all our markets we are going into an MSA. Actually, it starts from 1st of April, so we have spent time preparing, but it's starting now. There will be clear MSAs with pricing which will be volume driven and SLAs exactly as in a commercial relationship between the group and the markets. And this will also up these shared operations to our partners within the industry or beyond as needed. We see this actually as an opportunity going forward, but of course, wherever needed, we will always have our cost program, our efficiency programs in play as well.

Just as a very small build, of course, we are paying attention to this as well when we negotiate third party relationships so that we have the flexibility to adjust and potentially transfer if we have major carve outs from the

group. There are a number of areas in the shared operations in which we are absolute leaders in our industry, if you think about it. We have just started, for example, what is said to be the largest radio network tender in the world, probably outside China, I would say, through our procurement process. And this is a case in which, for example, Yen is going to join us so that we have better results for all. I think there are opportunities in the industry beyond Vodafone to commercialize our shared operations. And we have also brought in Accenture, as you have seen, in the system to help us accelerate this transformation based on their experience on commercial operations.

Thank you.

Thank you for all your questions this morning. I will now hand back to Margarita for any closing remarks.

Thank you, everyone, for your time today. Vodafone is changing and we are seeing the impacts of our focus on our priorities of customers, simplicity and growth. Consumer NPS and the scores are moving in the right direction. We are transforming our shared operations to be a simple business. Vodafone business growth is accelerating in line with our ambitions, as we have discussed. And after announcing our transactions in the UK and Spain, we are engaged in constructive discussions in Italy. I look forward to updating you on our progress at our full year results in May with Luca. Thank you very much.