Vodafone Group PLC

LSE:VOD

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and welcome to today's Vodafone Group Trading Update Analyst and Investor Call. And throughout this, [Operator Instructions] And just to remind you, this call is being recorded.And today, I'm pleased to present Vittorio Colao, Vodafone Group CEO; and Nick Read, Vodafone Group CFO. Gentlemen, please begin.

[Vittorio A. Colao, Group CEO & Executive Director]

Thank you, Hugh. Good morning, everybody. Welcome to our trading update for the third quarter '17, '18. I will take you through the quarter's highlight, and then Nick will focus on the trading performance in our major markets before we move together to the usual Q&A.So I will start on Slide 4 with the highlights for the quarter, starting on the left. Our financial performance is similar to Q2 with 1.1% organic service revenue growth. Within this, we saw a modest slowdown in Europe to 0.3% and an acceleration in AMAP to 6.8%. As in prior periods, these results include a material drag from EU regulation as well as the negative impact of handset financing in the U.K. So our underlying growth was above 2% as Nick will explain later.Foundation of our growth is the leading or core leading network positions that we enjoy as a result of our substantial investments in mobile. We now reached 93% of the population with 4G, and we have the best data networks in 14 out of 21 of our largest markets. In fixed, we now reach 63% of 104 million European homes with fiber, of which 42 million are on our own networks or via commercially attractive strategic partnership. This network leadership drives our 3 growth engines, the usual ones. First, mobile data, which is on the third column in the slide, which is growing still at 61% in Europe and AMAP, supported by ongoing 4G adoption and larger data bundles following our successful more-for-more actions. Second, next column, fixed. Here, we added 379,000 new broadband users in the quarter, including a record 529,000 on NGN. Third, enterprise, 1.6% growth, excluding EU regulation. This reflects good trends in fixed and in IoT in most markets. And then in the final column on the right, we highlight our customer's perception of our services. Based on Net Promoter Scores, we are the leader or core leader in 18 markets, with a substantial gap versus the third-place player during the quarter.So I will move to Slide 5. The sustained NPS performance is translating into good commercial momentum. On the left of the page, starting with Europe, mobile contract customer growth, shown in the, let's say, lighter red bars, looks down sequentially and year-over-year. But primarily, this reflects postpaid to prepaid migration in Italy as a result of a new committed offer, prepaid, which is based, however, on credit card payment at the start of the month. So this is not a significant commercial slowdown. In fixed broadband, which is the thicker red bar, our growth was similar to last year, including a record quarter both in Italy, 95,000, and in the U.K., 39,000. This quarter also benefited from the accelerating demand from NGN, which we are capturing with a record 496,000 additions.On the right, in blue, AMAP. Customer growth remains strong in both contract and in prepaid due to our network quality, distribution reach and high standard of customer service. As usual, I would say that scope for further growth remains strong given the data penetration remains just at 47%.So next slide, moving to Slide 6, you can see here the contribution of our 3 growth drivers to our overall service revenue growth of 1.1% in the quarter, which is the red bar. The circle above the green bars, you can see the change in contribution compared to Q3 last year, highlighting whether a growth driver is accelerating or decelerating. On an underlying basis, European consumer mobile, the first block, contributed 60 basis points to our growth, slightly more than the previous year, as we monetize higher data usage through our second year of more-for-more commercial action.The contribution from mobile growth in AMAP, second green block, was 1%, but slowed by around 50 basis point due in particular to South Africa, where we proactively lowered our out-of-bundle data pricing. Our fixed growth, third block, continues to accelerate, as you can see, just a bit, and we remain the fastest-growing broadband provider among our peers. And finally, enterprise had a slightly weaker contribution, primarily due to the U.K. as I will describe later. So altogether, the underlying core business drivers, the green bars, contributed around 3% of growth.Then on the right of this chart, you can see the drags from regulation, handset financing, carrier services and also our strategic choices in containing wholesale revenues, which have increased compared to last year, reducing our growth by almost 2 percentage points to the 1.1 level, which you see in the last bar and I commented earlier. Now clearly, over time, some of the drags will remain, but in aggregate, they should reduce.Now let me walk you through the progress on each of the growth drivers in detail in the next 3 pages. On Page 7, you can see a summary of our initiatives to monetize mobile data. As you can see on the left, data traffic in Europe and AMAP continues to grow strongly, up 61% in the quarter. This was driven mainly by higher average smartphone usage, which is now 2.2 gig per month in Europe, which is a rise of nearly 50% year-on-year. We are monetizing this growth through more-for-more strategies using a variety of different approaches, which we show on the right part of the page.Spain, for example, is a good case of classic more-for-more approach. This week, we have announced a EUR 4 price increase in our most popular convergent bundles, giving in exchange an additional basic mobile line in the social pass, integrating, therefore, the pass into our core offering. This underpins our confidence that our leading competitors will not remain excessively promotional despite the more intense quarter we have just seen, which Nick will comment more about later.We also continue to use the pass on a stand-alone basis, especially in markets where data bundle sizes are more modest. In Egypt, the recent introduction of hourly passes attracted 570,000 users for an additional 2 pounds, Egyptian pounds, per hour, boosting the number of active users by 7%. Segmentation is another powerful way to boost data value. In Portugal, our youth proposition leveraging on the successful [indiscernible] is something that was developed in Italy and we covered already in the past, has had good results, driving a 9% increase in top-ups for these customers. Last, but certainly not least, is the huge opportunity presented by advanced data analytics and big data to personalize offers to the customers. We have many examples here. South Africa, we talked a lot already in the past, is arguably the most successful so far with the Just 4 You campaign, with almost triple data bundle sales in Q3, helping to offset the drag from the lowering of the out-of-bundle data rates.On Slide 8, you can see the benefit from these various initiatives to consumer contract ARPU, which is supported on an underlying basis, thanks to more-for-more price moves and larger data allowance. In the chart on the left part, we show the ARPU on a reported basis, which, in general, is declining. And then the same adjusted for regulation, handset financing and the large negative mix effect from the shift from lower-price SIM-only bundles, which are now 30% of the base in Germany and the U.K. and up around 55 percentage points on last year. Once you do this adjustment, you can see that Germany is, in fact, growing, primarily thanks to the more-for-more initiatives from new customers in April '16 and in April 17, together with our focus on more profitable direct channels. However, DTE did not change its prices following our most recent more-for-more initiative to increase the offers by EUR 3 in October. So we had to introduce a 3-month free promo in the quarter.In Italy, our prepaid ARPU continue to develop positively, reflecting the success of our newer bundle line segmented offers in the quarter, as well as the success of our targeted efforts to lock in higher-spending customers with more generous data bundle. However, the BTL market remains intense, and the new entrant is expected to launch in the coming months.U.K. U.K. customer ARPU is growing as well on an underlying basis, thanks to more for more, a better inflow mix of higher-value customers and inflation-linked customer price increases. And finally, in Spain, the benefits of our refresh moves of last April were offset in the quarter by intense promotional activity from leading competitors, resulting in a slight ARPU decline. So Spain is the only one on the slide that you see on the right part is negative.So overall, I would say that Q3 has been slightly more promotional quarter with a clear industry trend towards larger data allowances. But given our differentiated network quality and the opportunities from deploying advanced data analytics, we continue to see opportunities for monetization depending, of course, on the behavior of the higher other top-quality providers in the market.Moving to Slide 9. Here, we are pleased with our progress in fixed, where our capital-smart infrastructure strategy, which you can see indicated on the right, continues to deliver strong results, as you have already heard. Fixed now represent 29% of our European revenues. The chart highlights our fixed scale in each country and some key recent developments in our build activity as well as our strategic partnerships.Starting with the U.K., we are delighted that CityFibre has recently announced that Milton Keynes will be the first city where it builds out FTTH. The next 11 cities will be announced during the coming year as a part of our commercial agreement to support a build-out to 1 million homes. And then we have the option to expand to 5 million homes in the future. In Germany, we are scaling up the initiatives behind the EUR 2 billion Gigabit Investment Plan to reach business parks and rural homes and also upgrade cable. We have already successfully piloted the switch-off analog services to support the upgrade of our cable infrastructure to DOCSIS 3.1, and we are in active negotiations with a number of municipalities and business parks.In Italy, Open Fiber continues to progress. As of the end of December, Open Fiber had passed 2.4 million homes, of which 1.9 million are now marketable. And while the number of home passed grew by 400,000 in the quarter, the number of homes marketable increased by only 150,000. This is because Open Fiber has begun actually expanding into the 81 new cities in addition to the original 13, and inevitably, there is a time lag between building coverage and the point at which, for us, it is commercially efficient to open a city and start marketing.And finally, in Portugal, we commenced the network share build with NOS. So our program progress in fixed creates the platform for us to drive convergence across our combined customer base with just under 200,000 converged customers added in the quarter.And finally, last slide for me, Slide 10, Enterprise, as I said, is 29% of group service revenue. In Q3, overall Enterprise service revenue increased by 40 basis points, which you can see in the gray bars, on the third gray bar, on the left part of the chart. Excluding the impact of the regulation, Enterprise grew 1.6%, this is the red bar. This performance was impacted by a slowdown in the U.K., which was the result essentially of customer losses during previous quarters and some quarterly project phasing. The green bars exclude the more volatile U.K. performance and highlight the positive ongoing momentum in Enterprise across the remainder of our footprint, with growth of over 3%. This reflects the combination of robust fixed and mobile growth and includes also IoT, which is up almost 19%.On the right, you can see the story market-by-market. Germany is now back to growth and Italy, Spain and South Africa are all performing well. In the U.K., now primary focus is improving the profitability of the former cable and wireless assets by eliminating legacy networks and transforming our cost structure. So now Nick will comment the different markets.

[Nicholas Jonathan Read, CFO & Executive Director]

Thank you, Vittorio, and good morning, everybody.Turning to Page 12. As Vittorio has already highlighted, we maintained our momentum in the third quarter with similar reported service revenue growth to Q2. The chart on the left-hand side of the page shows that our underlying performance, excluding the drag from EU regulation and the impact of U.K. handset financing, was materially higher at 2.3%, and again, similar to prior quarters. In aggregate, these drags on our reported growth were broadly similar quarter-over-quarter as the reduced drag from roaming post the peak summer quarter was offset by the growing impact of U.K. handset financing.Note that our low-margin carrier business continued to drag on our year-on-year growth by around 70 basis points, as was the case last quarter. This follows the implementation of a new traffic optimization engine, which has improved profitability. The chart on the right shows our growth by region. As you can see, Europe slowed on both a reported and underlying basis by around 50 basis points. The decline in quarterly trends reflects the lapping of price rises in Italy and higher promotional intensity in Spain during Q3. Our underlying growth rate of around 2% reflects strong fixed growth of over 4% and mobile growth of around 1%. In AMAP, growth accelerated to 6.8% from 6.2%, reflecting a broad-based improvement in Vodacom.Moving to Slide 13. You can see a summary of the competitive environment and commercial performance of our major European markets in the quarter. In Germany, the competitive landscape remained broadly stable. Our co-leading network quality continued to support good customer base growth with a 144,000 mobile contracts and 89,000 broadband net additions in the quarter. Reported service revenue growth improved to 2.5% from 1.6% in Q2, reflecting lower regulatory drags from roaming and the lapping of the MTR cut last December. X regulation, our underlying performance was a robust 3.4% growth.Looking ahead to Q4, we face tougher prior year comparisons in wholesale, and we also begin to lap the inflection in postpaid subscriber growth in Q4 last year. As a result, despite also lapping the remaining MTR drag, we expect Q4 reported growth to moderate slightly compared to Q3.Turning to the U.K. The competitive environment also remains stable. Our mobile recovery continued to gain momentum, as much improved customer service and a record network performance led to another gain in NPS and 1.6% underlying mobile growth up from 1% in Q2. Our commercial momentum was solid with 41,000 mobile contract net adds. While this was down year-over-year, importantly, the quality of our customer mix continues to improve. We also enjoyed our best-ever quarter in U.K. broadband. This improvement in consumer was offset by a decline in our fixed enterprise business, which was the result of both prior year customer losses and project phasing as Vittorio mentioned earlier. Together with an increasing headwind from handset financing, which dragged on growth by 3.6% compared to 1.5% in the prior quarter, this led to a reported sales revenue decline of 4.8% in the quarter.In Q4, we expect to see further underlying improvements in mobile, together with some reversal of the project phasing impact in fixed, which we experienced in Q3. In Italy, competition remains intense with below-the-line promotional offers continuing. However, mobile net port volumes were stable year-over-year following a significant step-up in prior quarters. In mobile, our new segment, propositions and personalized offers, have helped to improve our sales mix and customer retention, resulting in lower prepaid losses. While in fixed, we had another record quarter. The slowdown in service revenue growth compared to Q2 was expected, given the full lapping of mobile tariff changes from the prior year.And finally, Spain. The high end of the market was extremely promotional in Q3, with significant discounting by all the major operators. This led to a higher churn in both mobile and fixed during the quarter. Despite this, our commercial performance remained robust with 30,000 mobile contracts and 68,000 fixed broadband customers added in Q3. Growth slowed to 2% as a result of promotions, as well as around 100 basis points drag from lower visitor revenues quarter-over-quarter. Promotional activity in the higher-value segments on the market ended in early January, and price rises have been announced by all the operators.Moving on to AMAP on Slide 14. In general, we saw a stable competitive environment. In Africa, we are enjoying strong customer base growth. However, we have been working proactively to lower out-of-bundle data pricing, a key focus area for consumers and regulators, with rates reducing by up to 50% from the beginning of October. We aim to mitigate this impact through growing in-bundle usage, which we succeeded in doing throughout the quarter, with data revenue growth in December back above 13%. Service revenue in Q3 improved by 100 basis points to 4.9%, largely reflecting the lapping of MTR cuts in the prior year. In Vodacom's international operations, we saw a healthy acceleration in service revenue growth to 10.4%, supported by growing data demand in M-Pesa. In Turkey and Egypt, our commercial momentum remains strong. Service revenue in Turkey grew by 13.8%, reflecting continued strong consumer contract base growth and data usage; while in Egypt, service revenue grew 18.8% following successful segmented campaigns and price increases.Turning to India on Slide 15. The competitive and regulatory environment remains extremely intense with the market leader increasing the competitiveness of its tariffs despite price rises by the new entrant. This was further exacerbated by 57% MTR cuts in October. Consequently, as you can see in the top left-hand chart, service revenues declined 23.1% in Q3. Excluding the 9 percentage points impact from the MTR cuts, service revenue declined 14.2% or 1.5% Q-over-Q. Commercially, as smaller players have exited the market, we have seized the opportunity to win share, adding 5.1 million customers in the quarter. And as the chart at the bottom illustrates, we have been able to largely mitigate the impact of low revenues on EBITDA margin through effective cost control.We expect competitive pressures to increase in Q4 given the recent price cuts from Jio in response to Airtel, and there's also a further 2 percentage points regulatory headwind from a cut to international termination rates. With this challenging context, the positive news is that we are making good progress on gaining the necessary regulatory approvals for our merger with Idea, with the DoT now the last major step before we can complete the merger in the first half of the year. We've also taken steps to strengthen the proposed JV's balance sheet, having agreed the sale of the stand-alone towers and announced a combined cash injection into the merged company of up to EUR 1.8 billion. And we continue to explore options very actively to monetize both the JV's 11% stake and the group's 42% stake in Indus Towers.So turning to Slide 16. In summary, we have maintained this year's good commercial momentum through the third quarter and delivered similar revenue growth with improvements at Vodacom mitigating some of the increased promotional activity experienced in Europe. We also achieved further progress across our 3 strategic growth engines.In mobile, our more-for-more propositions continue to meet our customers' growing appetite for high-quality data and contributing to underlying ARPU growth. In fixed, we continued our strong momentum and enjoyed our best-ever quarter of NGN net additions in Europe. And in enterprise, our performance was robust as we continue to grow despite regulatory drags, aided by a leading IoT platform and global footprint.In India, the competitive and regulatory environment remains very intense, and we are making progress in securing the approvals that are needed to create a pan-India scale player in a consolidated market. In terms of our financial outlook, we expect to maintain our momentum in the fourth quarter, which, along with good progress of our Fit for Growth program, means that we are confident we will achieve our guidance for the year.And with that, I will hand back to the operator for Q&A. [Operator Instructions]

[Operator]

[Operator Instructions] And the first question is over to the line of Akhil Dattani at JPMorgan.

[Akhil Dattani, Managing Director and European Telecoms Analyst]

I just had a question on the service revenue growth outlook, please, and there's 2 little bits to it. The first is just on data monetization. Vittorio, you mentioned that with the passes, you're now evolving or thinking a bit in certain markets now incorporating out a tariff. So just keen to understand what you see on the ground that's making you do that. Is it competitive-led or is it a function of just changing your view? And the second view, Nick mentioned the SIM-only effect, the handset financing drags. So clearly, quite a few factors impacting your service revenue outlook at the moment -- or service revenue trend, sorry. I guess, what I'm trying to understand is, as we move to IFRS 15, how will that impact these distortions and how will that impact the growth rate you report?

[Vittorio A. Colao, Group CEO & Executive Director]

Thanks, Akhil. Definitely the second question, I'll leave it to Nick. On the first one, let me -- I think you said it. The passes have to be seen as part of our more-for-more strategy, and of course, they are impacted both by competitive dynamics but also by the type of offers that we have in different markets. So it is clear that in certain markets, they are more stand-alone offers. In other markets, we have to include them or we want to include them into our converged offers or we want to include it into our SIM-only offers. So at the end of the day, a pass is another way to give worry-free usage in exchange for something, and the something is the underlying ARPU. I am, I would say, comforted from -- there's one slide in my pack, the slide that says taking out the distortions. Actually, we see a pretty good net ARPU trend. And with exception of Spain, which was a bit promotional last quarter. So they're part of a grow -- overall strategy to monetize data and increase usage, and they can be used flexibly in each market. To some extent, in some markets, even to the hour, they can be used. So I hope you answered -- I answered your question. Nick, IFRS 15?

[Nicholas Jonathan Read, CFO & Executive Director]

Yes. Akhil, I mean, obviously, a slightly complex topic. What I would say broadly on S-15 is because when you bring in S-15, you're effectively restating your previous year. You won't see a dramatic impact. You might actually see a slight improvement on service revenue growth, mainly because you don't get the SIM-only drag effect moving forward because of that restatement. So I think it's important. S-15 is sort of like a restated methodology, and therefore, when you're looking at growth rates, et cetera, not a big impact. I would say at the moment, probably the most material impact we're getting in our results on SIM-only is in Germany, and that's just under about 3 percentage points of drag given that drive.

[Akhil Dattani, Managing Director and European Telecoms Analyst]

Nick, can I just ask going forward, do you think you would stick to service revenues under IFRS 15 or do you think that would support a change to focus more on total?

[Nicholas Jonathan Read, CFO & Executive Director]

No, I think we'll still continue to have service revenue.

[Vittorio A. Colao, Group CEO & Executive Director]

I personally think it's healthy, Akhil, because, again, we need to look at stuff on which we make money. It's a little bit like enterprise. The more complex project we have like in the U.K., the more we have hardware and equipment, the more harder distorts the real number like, for example, this quarter. So for me, at the end of the day, I look at what generates cash flow, not at a reported number. So in that sense, it's a positive. And SIM-only can actually be good. It's not necessarily the fact that it looks like a lower number that we don't like it.

[Nicholas Jonathan Read, CFO & Executive Director]

Yes. And importantly, to Vittorio's point, you get a higher correlation with your EBITDA.

[Vittorio A. Colao, Group CEO & Executive Director]

Yes, and cash and everything. So it's good. Makes your life harder, but it's good.

[Operator]

We're now over to Barclays and Maurice Patrick.

[Maurice Patrick, Managing Director]

Yes, a question for me on spectrum, please. So you have a number of spectrum auctions coming up. Some, I think, are a combination of new licenses, some are renewals, some 700 megahertz, probably expensive, other high frequency so 3.4 gigahertz. So I was suspecting in aggregate, the cost of spectrum probably goes up by your historical EUR 1.2 billion a year, but thoughts on that. But also, can you share with us how you expect to see competitive bidding intensity across spectrum auctions in your key markets? You could argue that demand is probably higher given your strong tele growth, but then there's lots of [stretching] coming up, maybe less. So thoughts on competitive bidding.

[Vittorio A. Colao, Group CEO & Executive Director]

Yes. I leave to Nick the answer about the spreading and how much the EUR 1.2 billion is on average and how much instead we have -- we might have concentration in certain years. The second part of your question is intriguing because traditionally, I would have said how can I answer that. Auctions are auctions and it's always difficult to predict how they will go. The reality is, actually, in your question. There's already an element of truth. We have more and more technology options. It's more and more possible to aggregate bands, to exploit traffic in different ways. We can shut down certain elements. So my sense is that they will -- we will become more and more sophisticated over time, as long as we have, of course, some -- the courage to make some decisions in terms of allocation of bands and user bands. The actual result of each specific auction in the end will depend on how many people want to have the same band. But we will have more flexibility in the future. Nick, on the financial impact of this.

[Nicholas Jonathan Read, CFO & Executive Director]

Yes. Maurice, I mean, just to be sort of comprehensive. In terms of our expectation over sort of 2018, 2019, in terms of what are the auctions coming up, we do have a large volume. So 2018, we're expecting U.K. 2.3 and 3.5; Germany, 2.1 renewal and 3.5; Italy and Spain, 700 and 3.5; South Africa, at some point, I know I've been saying that for 5 years, will come hopefully in 2018. And then 2019, U.K., 700; and Netherlands, 700 and 2.1. So you're right to call out the fact that it is a heavier 18 months, 2 years ahead of us. What I would say, however, though, is I stress that the September point, the strength of our balance sheet, leveraged down at 2.2x, so we got a strong balance sheet and we're prepared for the spectrum auctions and had planned for those auctions. And then finally, I'd say that just in terms of the 1.2 billion long-term average, I still feel that's a good number and it's certainly the number that the board focuses on when thinking about dividend cover.

[Operator]

We are now of the line of Polo Tang at UBS.

[Yin Kin Tang, Managing Director and Head of Telecom Research]

Just have one question in terms of the U.K. broadband market. You obviously have a partnership with CityFibre in the U.K. for FTTH, but does this preclude you from wholesaling from Openreach? And what do you think about the announcement today from Openreach's overall FTTH to 3 million homes by 2020?

[Vittorio A. Colao, Group CEO & Executive Director]

Polo, it doesn't. Actually, our commitment to CityFibre is for the first million homes and then we'll see where it go. If in the meantime Openreach, like they announced this morning, wants to extend their reach, I mean, that's fine. As I said, we just had 38,000 net adds in the quarter, which, if you consider that we start from small and it's not consumer broadband, is not a traditional area for Vodafone U.K., actually it's a pretty good result. So we are encouraged by the take-up, especially from our own customers. There will always be a debate with Openreach about price and conditions and everything else. So per se, the decision to expand is good. We will always want to be competitive in the market and also to be able to make some money or at least not lose money on those connections. But there's no -- there's plenty of flexibility and I always said that our fixed broadband strategy is a smart strategy, capital-smart strategy. So we will not preclude any option if it's economic.

[Operator]

We are now over to the line of John Karidis at Numis.

[John Karidis, Analyst]

My question is about India. Now that the merger with Idea Cellular is near completion, what gives you confidence that execution there will be smoother than that in Australia with Hutchison? Is Bharti right to think that this merger is a good opportunity for them to poach a good chunk of your customers?

[Vittorio A. Colao, Group CEO & Executive Director]

Yes. You would have to believe that if you were Bharti, right? So listen, I don't want to answer in an arrogant way. We have been planning for this for a long time. Don't forget that we need to lose some market share anyhow because we are in certain circles, above the, how do you call it, the cap, the competition cap. We have been planning for a long time. The 2 companies in a way here are more complementary. Don't forget that in Australia, there was kind of a prepaid versus contracting. There was a very different positioning and to some extent head-on positioning of the 2 brands. And then every market is a different story. So I would not be arrogant. We have planned as well as we can. We know that we need to lose some. We are more complementary here than in Australia, and we are confident that we will do a good job. Then the results will be seen in the market.

[Operator]

We're now over to line of Nick Delfas at Redburn.

[Nick Delfas, Research Analyst]

I just wanted to confirm...

[Operator]

[Operator Instructions] We will go to the line of Dhananjay Mirchandani of Bernstein.

[Dhananjay Mirchandani, Senior Analyst]

I mean, I'm -- forgive [indiscernible] revenue trends. So active prepaid ARPU is up. Volumes, while negative, have improved sequentially. And yet, MSR is down 3%...

[Vittorio A. Colao, Group CEO & Executive Director]

Dhananjay, we missed the first 10 seconds. Start again, please.

[Dhananjay Mirchandani, Senior Analyst]

All right. I'm really struggling to get my head around Italian mobile service revenue trends. Active user ARPU is up. Volumes, while negative, have improved sequentially. And yet, service revenues are down roughly 3% and there's no real material drag from regulation. So I guess 2 parts the question. Can you please be a bit more specific about what's causing this? And secondly, I think more crucially, what do these dynamics imply going forward as Iliad already has entered the market?

[Nicholas Jonathan Read, CFO & Executive Director]

Yes. Maybe if I take the first part and then Vittorio takes the second part. But I just -- just from understanding the trends, I mean, they're fairly straightforward, and we have been signposting these. So the mobile business, down 2.9%. Why was it down or why has it been on a decline trend, it's because we did a series of price actions last year that were introduced over about a 6-month period. We were introducing 28-day billing. We started off with prepaid, we evolved it into contract, we evolved it into fixed. And so it's phased over the year. So what you're seeing is our slowly lapping all of those effects and some other more-for-more price actions we were taking. So we're now fully lapping in this quarter those price rises, and of course, given the competitive intensity in the market, we're not able to do any further actions at this point in time. What I would say is fantastic performance. I'd also say on the mobile side, a very resilient performance given the pricing environment, and I think it shows the strength of our mobile network, differentiated in the marketplace and the breadth of our distribution and the overall performance and signs being done in our SCM area. What I would say is also fixed is a strong performance at 12% growth and has maintained very, very strong performance. Vittorio?

[Vittorio A. Colao, Group CEO & Executive Director]

Yes. Looking ahead, Dhananjay, there's like 3 things happening. One is the kind of change tariff adjustment that I think all players are making neutral, the 28 days to solar month low requirement. So everybody is making that neutral for the customers and neutral to us. The second thing, we are, again, pleased and will continue to leverage on our strength on fixed line, which, in Italy, was particularly strong. I mean, this quarter, we had 95,000 additions. We passed just after the end of the quarter, the 1 million fiber broadband homes. So it's clearly becoming Italy -- again, with a different strategic path but solid as Spain or Germany in terms of convergence. We launched and we are competitive at the EUR 30 price point, the Vodafone One converged offer. What I see is in the market, we still have this below-the-line, let me say, EUR 9, EUR 10, 20-gig; EUR 9, EUR 10, 30-gig offers, which, of course, are a little bit preemptive of the Iliad's arrival. And so we have to be careful not being dragged into this kind of portability games that other operators are deep into. We are ready to see the arrival of Iliad. And I guess, in May, you, I and all the other people in this call, will have something interesting to talk about, but we are just where we were last time. Consolidating our base, being competitive and pushing convergence is the strategy so far.

[Operator]

We are now over the line of Robert Grindle of Deutsche Bank.

[Robert James Grindle, Research Analyst]

Hopefully, you can hear me okay. My question is about churn and the impact on customer costs. It seems like contract churn has moved up in a few of the European markets. You flagged commercial activity in Spain, et cetera, and I think Nick said something about SIM-only in Germany. But should we be concerned about rising customer costs because of this or is it more about SIM-only and we should be less worried about customer costs, which were actually very benign in the first half of your year?

[Nicholas Jonathan Read, CFO & Executive Director]

Yes. Robert, I wouldn't be worried about customer costs. I would say that we are being very -- apply a lot of science to our investments, ensuring the right channel mix is driven as we've discussed before. And CRM is targeted on a personalized one-to-one offer basis. So we're managing, if you like, the economic value of the customer. Of course, we stay focused on churn. We don't like churn, and we are constantly trying to work it down. I would say we had a few promotional hits in the quarter, and therefore, churn ticked up slightly. I don't see that as structural.

[Vittorio A. Colao, Group CEO & Executive Director]

Yes, we are pretty confident that from a cost perspective, the guidance is robust. We are also, don't forget, very focused on the transition to digital, which is also another way to make sure that customer cost actually go directionally in the opposite direction. So here, there are different forces at work. As I said, no concern for the rest of the year, but also longer term, the transformation into digital will make less, I would say, strike to the link between promotional activities and customer costs. You can still have a bit of churn, but the cost can be managed better in a digital environment rather than in the street, as you all know.

[Operator]

We are now over the line of Jonathan Dann at RBC.

[Jonathan Dann]

It's a question on the convergence trends. It looks each quarter as though net adds of convergence are sort of tracking just below net adds of the broadband base. And I was wondering, would you ever expect to see a sort of rapid expansion of convergence through the back book of existing customers?

[Nicholas Jonathan Read, CFO & Executive Director]

I'd say our primary focus at the moment is actually driving fixed net add performance. I mean, in the end, our customers are switching over to NGN networks and there's a window of opportunity that we're really trying to exploit. At the same time, we then try, and once we have the base, convert them across to convergence. So I would say that's why you're seeing the trend you are.

[Vittorio A. Colao, Group CEO & Executive Director]

Yes. I would say we had an opportunity. We are delivering well on fixed because we have an opportunity. We're a newcomer to the game. And as I said, I think our strategy market-by-market is smart. And that is the strategy. Then how much you push for convergence depends also a lot on the specific conditions in the market. In the Netherlands, where KPN is highly converged, it's clear that our objective, and we are already with Ziggo, big in cable, it's obvious that our push is for convergence. In Italy, as I said, for example, we played a little bit of a mix game. The first objective is to get fixed broadband customers. Now we launched also the Vodafone One and we also have a little bit of acceleration in the converged piece. But it depends on the state of maturity of the market and the opportunity that we have -- sorry, of the market of Vodafone and the opportunity that we have in front of us.

[Operator]

We now go over to Mandeep Singh at Redburn.

[Mandeep Singh, TMT Specialist Sales]

So the question I really had was coming back to what Akhil was saying at the beginning. If you focus on net ARPU, which is sort of gross margin EBITDA sort of metric that you can track better than we can because you don't have the disclosure -- or we don't have the disclosure, I mean, if ex regulatory impacts, ex handset financing, I mean, would the growth rates that we're experiencing in Europe be substantially better than what we see presented in service revenue trends? I know you can't necessarily give us a number, but just directionally in orders of magnitude, please?

[Vittorio A. Colao, Group CEO & Executive Director]

I leave the quantitative part of the answer to Nick, who is kind of scratching his head now. But directionally, you're right. That's what I really look at, and that's what tell us if the market is healthy. And I have to say in that sense, the more-for-more strategy is exactly what this is trying to achieve, to achieve the net income for us. I would even go -- include in commercial costs because at the end of the day, the more we go digital, the more we can manage that part in a proactive way and not just being victims of what happens in the streets, the more the net margin to us is an important thing. And in the future, we will become more similar to an Amazon or to one of these players who really look at the net margins that they can derive from any commercial operation after digital acquisition and customer management cost. I understand your life will be more difficult. We'll do our best to be transparent. Unfortunately, there's also accounting changes in the way. But directionally, that's what I think our dialogue should be on because it gives the real measure of the health of the customer. Nick, did I give you enough time to...

[Nicholas Jonathan Read, CFO & Executive Director]

You gave me enough time to think it through. I mean, how I'd look at it, Mandeep, is if you take the mobile contract European ARPU, you're talking -- we're down about 2.6% year-over-year. Of that 2.6%, and I'm talking broadly, I'd say about 2 percentage points to that is either regulation or U.K. handset financing. So we're just slightly down. Why we're slightly down? We're a little bit SIM-only drag and then probably a little bit of, I would say, enterprise price pressure in the marketplace on renegotiation. So you're talking sort of broadly stable as a dynamic. I have to be honest. Increasingly, there's so many distortions going on in mobile ARPU. So give an example, I was in Netherlands doing an operational review there for a couple of days. And as we drive, as Vittorio said, drive convergence into the base, we're applying a EUR 5 discount to the converged package all to mobile. Now it's an allocation methodology that's simple, but at the same time just looks like mobile's in decline when in fact, what we're really doing is improving the performance -- the economies of the customer and the lifetime value on a converged package. So mobile ARPU in and around and mobile service revenue, lots of allocations there over time, so I can see us over time moving more to what's the total revenue of the company, the customer, et cetera.

[Mandeep Singh, TMT Specialist Sales]

I was just following up for Nick who had trouble dialing in from a BT landline.

[Nicholas Jonathan Read, CFO & Executive Director]

Yes, yes, I can imagine.

[Operator]

We're now over to David Wright at Bank of America Merrill Lynch.

[David Antony Wright]

Just a question on India. We've obviously had the deal announced, I guess, give or take, a year ago. It initially looked a little stretched from a gearing perspective. You since had some changes, the MTR cuts. Obviously, the competitive intensity remains volatile. You just announced the recapitalization. Is that -- now are we done into deal closure or can you foresee the need for any more capital into that business, for instance, using Indus, et cetera? Or do we think we're done?

[Nicholas Jonathan Read, CFO & Executive Director]

No. We've taken, David, a number of actions, as you've seen, the EUR 1.8 billion in incremental equity. We've done the EUR 1 billion proceeds at the stand-alone towers. We're actively working on Indus Towers, so you got the 11%. Ultimately, let's call that another EUR 1 billion going in. You add on top of that, we've been working in discussions with the government about extending the spectrum life. We think that will go through this month. So going from 10 years to 16 improves, if you like, the liquidity position. And of course, significant synergies to come. So yes, it does rely on the direction of the market. We think the current position is an unsustainable one because we're underneath cost for all players. And so let's see if it was just a moment of excessive intensity given a lot of players were exiting the market. And I think there was a little bit of landgrab for those customers. But no, we're confident that any support that we may be required on funding going forward, we've got the Indian Tower assets, and therefore, it won't have an impact to the goods reported leverage position.

[David Antony Wright]

Just to be clear, this is not beyond the original Indus plan. You're not talking any of your Indus assets outside the perimeter of the original plan, is that correct?

[Nicholas Jonathan Read, CFO & Executive Director]

At this point in time, we're exactly per our initial plan. But of course, we have a sizable Indus state sitting over in India as well. And of course, we said all along that the state could get liquidated over time and we'll see what we do with the funds.

[David Antony Wright]

And still, a calendar first half or was it a fiscal first half target for completion?

[Nicholas Jonathan Read, CFO & Executive Director]

I think calendar first.

[Vittorio A. Colao, Group CEO & Executive Director]

Calendar.

[Operator]

We're now over to San Dhillon at Exane.

[Sanvir Dhillon, Executive Director & Senior Telecom Analyst]

So I guess, your thunder was somewhat stolen this morning given that one of your European telecom peers made a large bid for a content broadcast company. I would love to get your views on some of the convergence of TV and content into kind of a fixed mobile bundle, whether you think that is important, especially given that you have pretty large TV exposure through your cable acquisition in Germany, Spain and in the Netherlands as well.

[Vittorio A. Colao, Group CEO & Executive Director]

Well, this is a big topic. I imagine you are referring to TVC. First of all, I wouldn't call it TV, I will call it video because what is TV and what is not TV is becoming very blurred. Our position remains the same. We love to distribute video, whether it's Netflix, the BBC, whatever, Sky, YouTube, we love it. And we love to have -- to have the possibility to monetize it. Whether it's on cable or on mobile, it doesn't make a difference. This is very different from the need to own kind of production assets. I am skeptical about the need to own production assets. I am skeptical about the ability to monetize exclusive content rights, typically football, which -- or soccer, which is usually very expensive and has become more and more expensive, very hard to monetize in a direct way. That does not mean that some operators, especially in a particular kind of linguistic or cultural areas of the world, might see a value in doing it. I still remain not convinced that at the end of the day, content should go to everybody, and I don't see huge synergies in owning exclusive production or rights for a telecom operator. Unless you think you can not distribute to your competitors and use it in a, let's say, anticompetitive way, which usually the regulators don't allow. So we remain on our -- we like to distribute. If we are forced, we can also bid, but we don't think it's value creating.

[Operator]

We're now over to Andrew Lee at Goldman Sachs.

[Andrew J. Lee, Equity Analyst]

I was just wanting to follow up on Robert's question around churn. I wonder, given we're not so much cost reductions and EBITDA today, if we could -- if you could give us an update on your digitalization improvement on the top line and when we should start to see that coming through. If there's any stats you could give us on customer perception improvement following the digital tech you've incorporated so far, the NPS scores, churn in the call center or success -- successful conversion rates of up-selling. If there's anything you could give us that can show us the impact of -- any positive impact of digitalization on your top line today, and if not, when should we start seeing that come through?

[Vittorio A. Colao, Group CEO & Executive Director]

I would prefer to give those details a little bit more time and a little bit more kind of explanation. So probably May would be the right time and the kind of in-person presentation will be probably better. Let me say from my point of view, this is a multiyear program. We are very optimistic about the ability to deliver real actual cost reduction from the digitization and real actual improvements from the customer point of view in terms of the experience. Initially more on the consumer side, on the enterprise side, it could take longer. And we have -- or I would say, we are already ahead of our implementation plan with more and more, of course, coming on board between now and April and the whole of the Vodafone being fully in the program next year. It's a multiyear program. So you will have this topic over and over again, but I would say rather than giving kind of growth targets that are, in the end, complicated for you guys because then you need to see how much is reinvested, I think you will see the benefit in net actual cost reductions. Nick, do you want to give out more today or if you prefer to wait for May?

[Nicholas Jonathan Read, CFO & Executive Director]

I think we wait for May. I think you have summarized well.

[Operator]

Just due to time constraints, the final question for today is over to the line of Justin Funnell at Crédit Suisse.

[Justin Broderick Funnell, Managing Director, Co]

I just wanted to just touch on margins a bit. I mean, without drawing you into a conversation about next year's guidance, so if we could just take a look back at Slide 6, just to understand the margins of these different revenue segments a little bit more. So European consumer levels growing, presume that's a decent margin business, same for AMAP. Consumer fixed line, because of your cable assets, is a good margin. Enterprise, I suppose, some margin there. And then if you look at the negative drags, you've got regulation. You've got good margin on inbound, roaming, but less on outbound. Handset financing, I think you -- essentially, you got to see margins negative in this segment because of SAC. So does this reduce, does this could actually boost your EBITDA? And then carrier presumably is a low-margin business. So ultimately, trying of get to the implied EBITDA growth coming out of this sort of revenue mix, you've got about 3% growth from the green boxes. The greys are sort of very low margin. I could sort of rule of thumb take 3% times by 2 to get to EBITDA growth from operational gearing. And then add on savings, I'm getting a sort of mid- to high- single-digit EBITDA growth rate. As before, obviously, impact of Iliad. So what am I getting wrong when I make that sort of calculation, please?

[Vittorio A. Colao, Group CEO & Executive Director]

I love your way of saying I don't want to drag you into next year's guidance and then try to backward engineer me into a question that gives you that. Let me say I think your analysis is not wrong. That's why we wanted to say that we are confident about our delivery for this year, not for next year. You also confirm more or less what we said so far in the year, that we see a modest revenue growth but a more sustained mid-single-digit EBITDA growth. The -- of your comments, again, I don't want to go too much in detail. If one wants to be really picky, you would say probably the wholesale MVNO part of the grey is a real profit that you didn't mention because, of course, that's money that comes in and goes to the bottom line. But everything else you have said is directionally right, I would say. Nick?

[Nicholas Jonathan Read, CFO & Executive Director]

Yes. Justin, I'm just sitting here a little bit confused. What you're saying, that growing at 10% is somehow not pacey enough for you?

[Justin Broderick Funnell, Managing Director, Co]

No. I think the basic issue with your share price is that people love the 10% but don't really think it's sustainable, whereas your slide there, on Slide 6, if the maps of the -- the margin of the different columns is right, then there are -- perhaps it is, at least before we think about the impact of Iliad in Italy.

[Vittorio A. Colao, Group CEO & Executive Director]

Listen, we are not going to give guidance for next year. I think we basically said that you are -- apart from this comment on wholesale, your comments are directionally right, but we are not going to change guidance or to even talk about guidance. For this year, we are confident we can deliver. And we need to leave something for May, apart from digital telco.

[Operator]

Okay. As that was the final question for today, can I please pass it back to you for any closing comments?

[Vittorio A. Colao, Group CEO & Executive Director]

Yes. I mean, I think we covered really a lot of ground. I would say good delivery, growth, give and take, more or less in line with previous quarter. And I would say happy about the commercial momentum, especially on fixed line, but also on mobile once you look into the details. We are continuing to deliver. And we are confident that we can confirm the guidance and then have a good discussion in May about next year. Thank you very much for all of your questions, and I look forward to seeing you in the coming weeks. Thank you.

[Operator]

Thank you all very much for attending. And you can now disconnect.