Skip to main content

Operating environment and strategy

Vodafone’s strategy is focused on improving operational execution and pursuing growth opportunities in total telecommunications services, while delivering strong free cash flow.

May 2006 Progress to November 2008
Revenue stimulation and cost reduction in Europe Driving usage growth to offset price declines
Delivered on cost and capital expenditure targets
Emerging market growth Increased presence: Ghana, India, Poland,
Qatar and Vodacom
Total communications Annualised data revenue £2.8 billion
Broadband capabilities in 12 markets
Manage portfolio for maximum returns Disposal of non-core assets: Switzerland and Belgium
Capital structure and shareholder returns Higher dividends: 7.51p in 2008 (6.07p in 2006)
£20 billion cash returned to shareholders
Economy Weaker global economic growth and rising unemployment
Lower roaming revenue as enterprise and consumer customers travel less
Competition Ongoing price reductions due to competitive pressures
New entrants: Growing range of providers of converged fixed and mobile services
Expanding presence of mobile virtual network operators
Regulation Industry regulators continue to press for lower mobile termination rates and roaming prices, which impacts around 17% of Group revenue
Focus on free cash flow generation and execution Progress
Drive operational performance
Value enhancement
Cost reduction
Launched new products in a number of markets, which offer customers more value in return for increased commitment
Accelerated £1 billion cost reduction programme; expect to achieve 65% in 2010
Pursue growth opportunities in total communications
Mobile data
Expanded range of data devices with the BlackBerry Storm, iPhone and netbooks with built-in broadband
Revenue growth of 9% in Vodafone Global Enterprise
1 million new fixed broadband customers; closing base of 4.6 million
Execute in emerging markets
Delivery in existing markets
Selective expansion/ cautious approach
Nationwide footprint in India
Commenced operations in Qatar since year end
Acquired Gateway in Africa to strengthen total communications portfolio
Strengthen capital discipline
Shareholder returns
Clear priorities for surplus capital
Returned over 87% of free cash flow before licence and spectrum payments to shareholders in the 2009 financial year
In-market consolidation through merger of Vodafone Australia with Hutchison 3G Australia

“We are confident that our strategy is appropriate for the current operating environment”

Vittorio Colao
Chief Executive

The telecommunications industry remains attractive

Notwithstanding a challenging economic background and rising unemployment, the fundamentals of the telecommunications industry continue to be attractive. The sector remains relatively resilient, but not immune, as it provides essential services that serve a fundamental human need to communicate for work and social purposes. In this environment, the sector leaders, such as Vodafone, continue to be able to innovate and deliver new products and services as well as generate strong cash flow.

Although revenue from traditional services of voice and messaging in mature markets is growing more slowly due to competitive and regulatory pressures, there remains a significant growth opportunity in mobile data. There are also growth opportunities in enterprise and broadband markets due to increasing demand for integrated solutions, international services and converged offerings.

Within the Vodafone footprint, emerging markets, such as India, continue to exhibit the potential for strong growth due to low mobile penetration rates of around 38% on average, compared to over 120% in Europe, which together with higher GDP growth prospects, provide a significant customer growth opportunity.

Vodafone is well positioned in the telecommunications industry

The Group believes its leading market position is demonstrated by a strong level of free cash flow, with some £18 billion generated over the last three years, a resilient structure based on a diverse portfolio of assets in both mature and emerging markets and a number one or two ranking in most countries in which it operates. The Group has also been a pioneer in data products and services, developing high speed mobile broadband networks and providing simple to use and attractive devices with features such as touch screen technology. The Group has a recognised brand in consumer markets and a strong position in the enterprise segment. In addition, Vodafone is already well placed to benefit from growth in emerging markets, with a presence in a number of the countries where significant growth is expected. In a difficult market environment, the ability to control and reduce costs is ever more important. Against this background, the Group continues to drive network and IT savings through both consolidation and centralisation of core activities, as well as local operating company initiatives. Vodafone also benefits from a variable cost base as only around one third of cash operating costs are fixed.

May 2006 strategy

In May 2006, Vodafone formulated a five point strategy and strong progress has been made against the key objectives. Mobile phone usage has grown significantly, partly offsetting price declines, key operating costs and capital expenditure targets have been met and exposure to emerging markets has increased. The share of revenue from non-core mobile or total communication services has grown through both significant data revenue growth and an increased fixed broadband presence. In addition, the Group has refined its portfolio of businesses and disposed of several non-core assets. Lastly, Vodafone has maintained a disciplined approach to its capital structure, which has proved right for the business, particularly in the current environment, and also returned a significant level of cash to shareholders.

Evolving telecommunications environment

A number of challenges have evolved since 2006. In particular, the macro economic environment has become more challenging. Competitive pressures continue to be strong, contributing to price declines of around 15% per annum. Consumers have an ever growing choice of converged communication offers from established mobile and fixed line operators and newer entrants including handset manufacturers, internet based companies and software providers. In addition, mobile virtual network operators, that lease network capacity from mobile companies, are becoming increasingly prevalent. Finally, regulators continue to press for substantially lower mobile termination rates and roaming prices, and these areas together account for around 17% of Group revenue.

November 2008 revised strategy

In light of the changing environment the Group revised its May 2006 strategy. The new key target is to focus on driving free cash flow generation. This target is supported by four main objectives: drive operational performance, pursue growth opportunities in total communications, execute in emerging markets and strengthen capital discipline.

Drive operational performance

Vodafone aims to improve execution in existing businesses through customer value enhancement and cost reduction.

Value enhancement involves maximising the value of existing customer relationships, not just the revenue. This approach shifts away from unit based tariffs to propositions that deliver much more value to customers in return for greater commitment, incremental penetration of the account or more balanced commercial costs. This requires a more disciplined approach to commercial costs to ensure investment is focused on those customers with higher lifetime value. Customer value enhancement replaces the previous focus on revenue stimulation.

The Group has established a significant number of initiatives which are expected to reduce current operating costs by approximately £1 billion per annum by the 2011 financial year, to help offset the pressures from cost inflation and the competitive environment and to enable investment in growth opportunities. As a result, on a like for like basis, Vodafone is targeting broadly stable operating costs in Europe and for operating costs to grow at a lower rate than revenue in emerging markets between the 2008 and 2011 financial years. Capital intensity is expected to be around 10% over this period in Europe and to trend to European levels in emerging markets over the longer term.

Pursue growth opportunities in total communications

Regarding growth opportunities, the three target areas are mobile data, enterprise and broadband. Vodafone has already made significant progress on mobile data, with annual revenue of £3 billion, 26% higher on an organic basis than that of a year ago, but the opportunity remains significant as the proportion of the customer base that regularly uses data services is only around 10% in Europe. In the enterprise segment, Vodafone has a strong position in core mobile services, mainly amongst larger corporations. The aim is to build upon this position and expand into the broader communications market, serving small and medium sized businesses with converged fixed and mobile products and services and to continue to increase the Group’s penetration of multinational accounts. In fixed broadband, the Group has a presence in all of its European markets and 4.6 million customers globally. Vodafone continues to adopt a market by market approach focused on the service, rather than the technology, and targeted at enterprise and high value consumers as a priority.

Execute in emerging markets

Vodafone is already represented in a number of attractive emerging markets. The Group’s principal focus is now on execution in these markets, particularly in India, Turkey and the existing African footprint, following the acquisition of a controlling interest in Vodacom based in South Africa. Where possible, Vodafone will also seek to maximise the mobile data opportunity. While new markets are of interest, Vodafone will be cautious and selective on future expansion. The primary focus will remain on driving results from the existing footprint.

Strengthen capital discipline

The Group is focused on generating £5 billion to £6 billion of free cash flow per annum, excluding licence and spectrum and any potential CFC tax settlement. In terms of cash deployment, the priority is to invest in existing businesses, expand in the growth areas of mobile data, enterprise and broadband and acquire, where appropriate, new spectrum to support voice and data traffic growth.

Beyond this, the Group will aim to enhance returns to shareholders, primarily by increasing dividends. In November 2008, the Board adopted a progressive dividend policy where dividend growth reflects the underlying trading and cash performance of the Group. The Group remains committed to the current low single A long term average credit rating.

After investing in existing business and returns to shareholders, the Group will consider opportunities to reshape the portfolio. In emerging markets, the focus is on execution rather than expansion. In addition, the Group’s current capital structure implies that any significant acquisition would likely need to be funded through portfolio disposals. Vodafone supports in-market consolidation, such as the recent agreement to merge the Australian assets of Vodafone and Hutchison 3G Australia to form a 50:50 joint venture.