Vodafone Group Exec Insights: New Technologies, Subsidies

On Tuesday, Vodafone Group PLC ADR (NASDAQ:VOD) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

New Technologies

Vittorio Colao – Chief Executive: Yeah, maybe I’d take both questions and then maybe Andy you can refine. First of all the growth question, we have been hit a little bit more than expected by MTRs. We will therefore be, this coming year, a little bit below or slightly below the 1% to 4%. Of course, we still have that ambition to grow. I have a strong value message in this phase also because you can grow in revenues but we also – I am truly convinced that there is an opportunity in Europe to grow in value, which is a little bit linked to the second question also. How do you create value? You create value by having stronger technological platforms and giving better service to your customers. (Through the) some smaller operators keep growing more but we are confident that if you look at the broad numbers I mean it’s nice to have a nice – a big percentage of smaller number and in some markets, you know like Germany you start seeing some strain on some of those players. So we are convinced that our strategy is the right one to create more value and hopefully to capture the higher part of that value in especially Europe. On the regulators, I think you have a point. We need to fight a little bit harder with the regulators because some of them are still alluded in an old model, but again, there is so much need in for investment, for employment and quite frankly for very good digital infrastructure and quality infrastructure that I see that the awareness if not the actions is moving, but I would have spend some time on that I agree with you. Andy you want to give more?

Andy Halford – CFO: I mean just the NTLs has been a growth driver than we had envisaged (server) as the growth is down a little bit. I said earlier the MTR effects of this next December I think actually the year after should start to improve a little bit. So that plus maybe the economic environment picking up should be a better space year after this, but growth that’s pretty robust.

Tim Boddy – Goldman Sachs: Since, I’ve got it. I guess related to idea that you want to create value what I’m seeing is some of the smaller place actually creating more value with the subsidy free model. So smartphone penetration is quite rightly been a KPI for last few years, but with obvious implications for your costs. He put some blunt measures in Spain is not a model that makes more sense across Europe or are there more social things that you can do to reduce spend and then be able to give more value back to your consumers. Then separately I’m just wondering how worried you are about Wi-Fi cannibalization and the risk that network differentiation will be harder for you or more expensive where you don’t own your own Wireline and whether or not Verizon style cable partnerships might make sense in the future?

Vittorio Colao – Chief Executive: Yeah this is like four questions in one. So Simon and then we go back in this way, and then that way. First of all your question on the subsidy model I think that the Spanish model I mean first of all, I support that and we support that as you have seen by our commercial moves. It’s a healthy thing and we are trying not just in Spain to go there, as I’ve said, we are moving to an efficiency measure of A&R which tries to pull back the amount of upfront (investment) or at least to make it more proportional. We can do it now much better than in the past, thanks to the availability of many more of these things. Of course, it’s something that we have to manage relative to each market. So to be clear, things have to progress throughout all players and if some players are faster or slower to adjust to the new model, well, we will play whatever game make sense for the specific market. The question on Wi-Fi, I would say that it’s a little bit of a miss that fixed operators have an advantage there. Yes, we’re embracing – as Steve maybe you can make few comments on that. We’re embracing all new possible technology whether it’s Femto, Wi-Fi, lamp post I don’t know what there is the next thing, but the reality is that it is the operational implementation, which is difficult. It’s not the fact that you own or you don’t own the little fibre that goes there. It’s who owned the lamp post, is it the borrower, is it the London Transport Authority, is it in neighborhood, is it the cabinet which is a owned by BT. So there is a so much operation and complexity where we don’t think honestly that we’re at disadvantage here. Actually, we’re all in the same place. We are going to play that game, but it is not about who owns the link that is going to make a big difference. Steve, you want to talk in more technical terms?

Stephen Pusey – CTO: I think to add to that, I mean, we will incorporate Wi-Fi in our small cell technologies. So for us we’re agnostic, we’ve always said that to the wireless technologies and other wireless technology. Interestingly, we’ve been measuring and monitoring the performance of Wi-Fi versus LTE in the higher order HSDPA and in four big markets where we have tested, we are outperforming Wi-Fi in the public environment in more downlink speeds. So I think we get too hang-up on Vittorio has said, the radio versus the operational degree of difficulty, the backhaul challenges that exist absolutely with Wi-Fi were the same as macro and the benefit of macro HSDPA or LTE is the consistency of the service to handover the quality that we can deliver, et cetera. So we’ll take Wi-Fi. We’ll bring it into our mix. Any incumbent faces the same challenges on real estate and distribution of small sales that we do and largely one might argue the effects of Wi-Fi on smartphones and tablets in the home, we have already gone through that wave, because it is what is it on the amount of data volume consumed in homes. So we are talking I think the question is more public Wi-Fi and I would say we will incorporate it in our mix.

Vittorio Colao – Chief Executive: There was something on Verizon but I couldn’t really understand what was the question.

Tim Boddy – Goldman Sachs: (indiscernible) cable partnerships.

Vittorio Colao – Chief Executive: Yeah, it is a market by market thing. So we will look and we are looking at partnership agreement of different kinds with both content owner and their infrastructure owners, it’s a market by market thing. So Verizon has got pretty good one in the U.S.

Subsidies

Simon Weeden – Citigroup: Simon Weeden from Citigroup. Three questions, one is a small one. dividend cover, as we look at the growth in the dividend and the free cash flow, I’m just really talking about the ordinary dividend, and does it come a point where you are (indiscernible) free cash flows covers the ordinary dividend, is that something that we should think about from beyond the current fiscal year in terms of the growth in the dividend? Second one is just to come back to the subsidies and commercial cost side of it, if as we’ve seen sometimes in certain areas there is a migration towards (indiscernible) in the away from subsidization, you get a revenue drag associated with that as customer’s ARPU full, because they are not paying for the subsidy recover anymore. First of should we expect that drag to be something that is present in the total revenue for Europe over the next few years? Secondly, is it time to start to disclose what proportion of your revenue in some way is influenced by that need to recover a subsidy associated with the sale? So you’re not seeing just voice, data and text, you’re seeing voice, data, text in handset of device. And then just finally, the quick one was, is there going to be any prospect in the near term, well in the near term then what sort of timeframe do you see retirement to 2G networks, being a factor?

Andy Halford – CFO: So while Steven and James prepare their questions, let me get a piece of the second one and then passed on the Steve and Michel, the other one. Let me say, I half agree with you, half agree in the sense that it’s not by coincidence that I have said that internally we measure and we will have to measure more ARPU and AMPU, so margin per customer as oppose to just pure revenue, because at the end of the day if you lose a piece of the revenue, because that goes into a financing scheme, but you lose the cost of the subsidy and the margin goes up, it could be good news actually. And that’s the way we are teaching and we are internally debating all these commercial decisions, because at the end of the day, it’s the margin that really matters and it would be more and more margin. I don’t agree with when you started talking about disclosing the voice, the data there, because in reality with integrated pricing, these are accounting allocations. At the end of the day, I pay in the U.K., GBP26, GBP31, GBP46, whatever it’s going to be for a set of services. So I believe it’s going to be more revenues and margin rather than splitting into the specific things. Andy, dividend cover, retirement of (2G) and share maybe another comment about subsidies, if you have anything more?

Andy Halford – CFO: On the dividend cover, I’m following – I mean we are talking about high 5s, mid to high 5s of free cash flow, we have mid to high 4s of dividend. We’ve got new debt level at the lowest level it’s been at now for really quite a long period of time. We’ve got Verizon Wireless cash coming in hopefully on the (recent) regular basis. So I think when you put all of that together, I think we are in a good space. I mean the uncontrollable clearly is the FX particularly on the euro, but that is why I don’t think we’re in a good space on the dividend cover.

Vittorio Colao – Chief Executive: The retirement?

Stephen Pusey – CTO: Yeah. We don’t unnecessarily look at it as 2G, 3G and 4G because with single-line RAN as I said (80%) of footprint on that, it’s a shared infrastructure. So we look at it a different way. For sure there was an evolution of customer types towards smartphones and tablets which is reducing the reliance on the 1,800 and 900 spectrum that was originally designated for 2G voice and text. So you’re seeing us we’ll use that as the customer’s migrate and (refarming) the 900 and that will continue. So I think infrastructurally single RAN is somewhere agnostic to that and as well as a backhaul. So the benefit for us is you’re reusing that spectrum as we evolve those customers opt for a smatphones and you’ll see that continue. There are some network assets that we can retire that are capacity-driven and we’ll do that, but I think it’s a natural evolution that we’ll follow and the main benefit (indiscernible) is a spectrum reuse. Stephen James then we move here and then we move here and then we go Nick and we can see there, Robert.

Stephen Howard – HSBC: Stephen Howard, HSBC. Two questions. Firstly, do you think the term small cells which look to be the next big iteration technologically speaking are likely to be scale friendly, particularly if you fund some of the comments that we just heard on backhaul and the challenge that that represents. Then secondly, just trying to wrestle something positive out of your Australian experience, it would at least appear to demonstrate that if a meaningful gap opens up in service quality levels. It is very visible in revenues unfortunately that hasn’t been particularly in your favor in this instance. But what I would like to try to understand is what kind of differential do you think you need to open up in a positive sense, in order to drive meaningful observable revenue differentiation. If you look at that side, I think you had Page 32, you’ve got this figure of 100% objective by 2014, 2015 of device we put over 400 kilobytes per second. If that’s your objective and you think the network is a differentiator, where do you think your leading competitors are going to be at that date?

Vittorio Colao – Chief Executive: You take the first one, I’ll take the second.

Stephen Pusey – CTO: We’ve been doing lots of studies Stephen on small cells and (indiscernible). It’s something that we’ve grown out of the Femto work which we also pioneered and we moved to what we call public Femto, which we started in sovereign enterprise and other coverage. Originally, there were lots of challenges on interference was a line issue, we put them (in the lines, more line in) (indiscernible) driving password flipping not every three seconds and it was crashing everything. So we’ve experienced that wave of learning. The economics of deployment and not so much backhaul because we can mesh backhaul then we can put it off on high road of fibre, the real issue is what Vittorio alluded to, there would be a new challenge for real estate and new kinds of real estate requirements for small cells, it would be a lamp post the size of buildings, the acquisition of suitable consistent power phase, et cetera. So our main concern is not so much of backhaul, we’re pretty well equipped with fibre into our City Centers now maturings and fibre to the base station where it matters and we’re increasing that, it is the real estate and the challenges in acquiring real estate to put these things on.