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Vodafone Group Public Limited (NASDAQ:VOD)
H1 2013 Earnings Call
November 13, 2012 4:30 am ET
Vittorio A. Colao - Group Chief Executive Officer, Director and Chairman of Executive Committee
Andrew N. Halford - Chief Financial Officer, Executive Director and Member of Executive Committee
Paolo Bertoluzzo - Chief Executive Officer of Italy & Southern Europe Operations
Stephen Charles Pusey - Chief Technology Officer, Executive Director and Member of Executive Committee
Nicholas Jonathan Read - Chief Executive Officer of Asia-Pacific & Middle East Region
Philipp Humm - Chief Executive of Northern & Central Europe
Timothy Boddy - Goldman Sachs Group Inc., Research Division
Simon Weeden - Citigroup Inc, Research Division
Nick Lyall - UBS Investment Bank, Research Division
Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division
Will Draper - Espirito Santo Investment Bank, Research Division
Stephen Howard - HSBC, Research Division
Andrew Beale - Arete Research Services LLP
Ottavio Adorisio - Societe Generale Cross Asset Research
John Karidis - Oriel Securities Ltd., Research Division
Christopher Nicholson - Oraca Ltd.
Jeremy A. Dellis - Jefferies & Company, Inc., Research Division
Justin Funnell - Crédit Suisse AG, Research Division
Paul Marsch - Berenberg Bank, Research Division
Emmet Kelly - BofA Merrill Lynch, Research Division
Akhil Dattani - JP Morgan Chase & Co, Research Division
James Ratzer - New Street Research LLP
John Davies - Grupo Santander, Research Division
Vittorio A. Colao
Good morning. Welcome. Thank you for coming this morning again to our half year results. What I would like to do now is to go, as usual, through the highlights of the first half results. Then I would pass, as usual to Andy, who will cover the financial review and a little bit of operational details on our main market. And then come back and take a broader view on the progress that we are making in our strategy and also talk about the context that we expect for the near future.
And then, we will be joined by Steve Pusey and by the regional CEOs. Nick Read, whom you know, who manages the Emerging Markets; Philipp Humm, who just joined us and manages Northern Europe or Rich Europe; and Paolo Bertoluzzo, who manages Italy and Southern Europe. I didn't call it poor Europe.
So here are the highlights of our first half results. Group organic service revenue in the first half declined 0.4%. In the second quarter, the decline was 1.4%, following a first quarter positive by 0.6%. Our adjusted operating profit in the first half increased by 8.5%. We had, in the last quarter, strong growth, continuing strong growth from data, 13.7% and emerging markets. And, of course, we had some challenging headwinds in Southern Europe. The company has generated in the first half GBP 2.2 billion of free cash flow after continuing investments in networks, technology, and especially, high-speed data networks.
The board has resolved the increase in the dividend per share by 7.2% to 3.27p. And we announced, following yesterday's decision of the Verizon Wireless Board, to distribute GBP 2.4 billion of dividend. We announced that we are going to use GBP 1.5 billion of those for share buybacks.
Finally, this morning, we confirmed the guidance for '12, '13 on both operating profit and free cash flow. But Andy will cover in more detail all of this.
Andrew N. Halford
Right. Good morning, everybody. Let me just provide some color to the numbers. So, the overall group revenues were just under GBP 22 billion for the half year. That is broadly stable on a like-for-like basis. The group service revenue at GBP 20.2 billion, as Vittorio has mentioned, was down about 0.4 percentage points after the impact of MTRs. So pre-MTRs, that was an increase of 1.4%.
The group EBITDA was GBP 6.6 billion, which is down on last year primarily because of the significance of foreign exchange movements, in particular, the appreciation of sterling against the euro, which I'll come onto later. The EBITDA margin was down on an organic basis by 1.0 percentage points, but within that, we had restructuring charges, which were about 0.3. So excluding those, the margin was down by 0.7 year-on-year.
The contribution from Verizon Wireless was very, very strong, and we had a 25% increase in the contribution from the U.S., with the consequence that the adjusted operating profit was up by 8.5% at GBP 6.2 billion.
If I then move on to the sort of lower part of the P&L, net financing costs are slightly lower year-on-year, primarily due to lower mark-to-market losses than in the previous first half. The tax was an effective tax rate of 26.6%. That is slightly up on last year, primarily because of the higher proportion of our profits that are coming from the U.S. with the higher tax rates that we have there. Of note, we have looked very, very carefully at the situation in India with our tax case over there. And we have concluded that we will continue not to make any provision for that settlement.
Halfway down the table in the prior year column, the GBP 3.2 billion number was the profit on the sale of SFR last year. This year, we have taken a GBP 5.9 billion impairment charge. This relates to Spain and Italy. It is about 60% Spain and about 40% Italy. Roughly half of the write-down is due to the current trading environment and the outlook, and roughly half of it is to do with technical factors, like foreign exchange movements and discount rates, with the latter clearly being impacted when sovereign debt ratings reduce. That is putting up interest rates and, hence, has a negative impact upon carrying values.
The adjusted earnings per share at 7.86p was up 1.4%. And as Vittorio mentioned, the dividend per share is being increased consistent with our 7% policy, up to 3.27p.
And finally, the free cash flow at GBP 2.2 billion, although a little bit lower than last year, for reasons I'll come on to later, represents about 40% of the envisaged full year free cash flow, very similar to last year.
So let's then take a look at the service revenue trends. Last year, the first half had GBP 21.9 billion published service revenue. The significant change in the foreign exchange rates, particularly the euro, so first half of the prior year, an average rate of 1.14; and for this half year, 1.25. So FX alone has had about a GBP 1.6 billion negative impact upon the revenues. M&A, as well, net effect with Cable & Wireless, Polkomtel, et cetera, is about another GBP 100 million. So if you normalize for those 2 and then do a like-for-like comparison, essentially, first half a year ago, we were just a fraction over GBP 20.2 billion. And in the first half we're reporting on now, we're just a fraction under GBP 20.2 billion.
And going across the chart from left to right, MTRs having their normal impact, taking the numbers down just under GBP 400 million. Underlying voice was down a little, but the growth in data is more than compensating for it. Data revenues are up 15.3% and are now running at an annualized rate of GBP 6.5 billion.
Messaging revenues were fractionally down, albeit messaging volumes overall were actually fractionally up. So slightly lower rates of volume in Spain and Netherlands than in the previous year; and India, because of some regulatory constraints, also had the volumes constrained. But notwithstanding that, the overall volume in messages was up very slightly. Fixed revenue was up marginally and the wholesale revenue's up reasonably strongly, particularly in Germany, Italy and in Spain.
So let's now have a look at the second quarter. As Vittorio said, the second quarter had an overall rate decline of 1.4%. On the top right of this chart, you can see the split of that between the 3 regions that we're now reporting under. So Northern and Central Europe was up slightly, 0.7%; the Southern Europe region, as one would expect, was down 11.3%; and the AMAP region was up by 4.1%. That giving the group average of minus 1.4%.
The countries on the left that have been performing very strongly: the Turkeys, Ghanas and the Indias; and the countries on the right, that have been performing less strongly, not surprisingly, mostly the Southern European businesses and Australia, which we are still in turnaround mode on.
In terms of the growth in the second quarter compared with the first quarter, clearly, it has been slightly weaker. Some of that is to do with the MTR cuts in Italy, which have bitten into the second quarter results more considerably than the first quarter. Some of it is about general competitiveness in Europe. And some of it is AMAP, whilst growing, is growing slightly less quickly than it was before, weighed down a little bit by the performance in Australia.
Interestingly, if we take the same chart and we put Verizon Wireless in on a proportionate basis, Verizon Wireless grew in the second quarter by 7.8%, and that actually changes the overall group average from minus -- essentially minus 1.5% to plus 1.5 percentage points. And also worthy of note, I think in terms of geographical span and spread, that actually on a proportionate basis, Southern Europe represents only 16% of the total revenues of the group.
So with that, let me talk a little bit about the major operating businesses. So first of all, Germany. I think a robust service revenue performance, albeit at a slightly slower rate than in the previous quarter. So overall, service revenues in Q2 were up by 1.8%, with data revenues up by 14%. Enterprise revenues up 4% and strong performance in wholesale.
Particular focus in the German business on smartphones and getting more smartphones with our customers, so the proportion of our customer base that now has smartphones has gone up from 18% to 28% in the space of a year.
The EBITDA margin is down 2.6 percentage points. However, we took some restructuring charges in the period. If you x those out, the margin was down 1.2%, and that is very largely about the push on smartphones.
On the LTE front, progress there is good. We now have just under 3,700 base stations live. We have about 47% outdoor coverage. We have 260,000 customers and are typically seeing a EUR 10 per month premium on the ARPU.
So if I then move on to the U.K., I think the fair summary would be a more competitive market, but one where we are at least holding our own and probably gaining a little bit of share. The Q2 service revenue was down 3.2%, so slightly lower than in the previous couple of quarters. Within that, data continued to grow, 6%. We had margin down 1 percentage point, which is primarily investment in new customers. We have now got contract customers representing 56% of our total customer base compared with about 52% a year ago. So quality of the base, definitely improving. We have done a change in the price plans that Vittorio will mention later on, Vodafone Red. We have now 84% of our consumer contract revenues coming from integrated price plans.
Obviously, the next big event in the U.K. will be the auction spectrum in the early part of next year, and then, hopefully, going live with LTE service during the middle of next year. And finally, the U.K. business, very proud to have won the U.K. Best Network Award.
Now, let me move then on to Southern Europe where clearly things are more tricky. So Italy first. The service revenue declined in Italy by 12.8 percentage points. Roughly half of the deterioration, compared with the first quarter, is to do with the impact of MTRs. But nonetheless, pressure across the business. Enterprise revenues were down 6.7%. Fixed was down about 8% as we deliberately put more investment into more profitable mobile customers. Having said that, mobile on the Internet revenues were up by very nearly 36%. So definitely making good progress on the data front.
The margin in Italy was down 4.3 percentage points. That is very much about the compression of the top line. We have taken operating costs out of the business. We have been very disciplined on commercial offers, but nonetheless, it has had an impact on the margin overall. Again, we have done a refresh of the pricing with the recent announcement of the Vodafone RELAX price plans. And finally, LTE has also been launched in Italy in Milan and in Rome.
So moving on to Spain. As we all know, still from a macro point of view, a difficult market with high unemployment. Service revenues there were down by 12%. Data, however, was a strong performance; 17% increase in the data revenues. The proportion of smartphones in the customer base has gone up by 11 percentage points to 44% during the period. Margin is basically stable year-on-year, impacted by changes in the acquisition subsidy model that Vittorio will talk about later. We now have 34% of our consumer contract revenues coming from integrated tariffs, which has moved ahead nicely year-on-year. And Vodafone Red has actually been launched in Spain yesterday, reintroducing a level of subsidy, but at a lower level than previously and with more visibility importantly of the handset price for the customer.
So let's move away from Southern Europe and move down into Africa. Vodacom Group has had a good half year. So in the most recent quarter, the service revenue for the group, as a whole, was up by 4.6%. That comprised South Africa, up 0.7%; and the non-South African businesses, up a very significant 29.7%, very much fueled by increase in size of customer base and very much fueled by good performance on data revenues, which were up 17% in South Africa, 22% across the group as a whole.
Also very encouragingly, as you can see from the chart on bottom left, the EBITDA margin has moved significantly ahead, so about a 2-percentage point improvement in margin, with the scale benefits really starting to come through.
LTE was launched in October in South Africa, and M-Pesa is taking off extremely well in Tanzania, with 4.2 million active customers.
So on to India. Service revenue growth here was 11%, so still very, very strong performance, albeit at lower levels than previously. The reason for that: lower customer growth generally in the market and some regulatory controls that were applied during the period. However, growing our share of revenues, our Net Promoter Score still leads in the market. Our ARPUs were up by 3%. And generally, I think, a very, very strong performance commercially.
Also like Vodacom, big focus upon margins, and we've actually seen a 3-percentage point improvement in the margin in the Indian business, partly about scale and partly about lower relative A&R. We now have 32 million active data users in India. M-Pesa, we have just announced, will be launched shortly. And clearly, we have another spectrum auction in progress as we speak.
So let me move on then from the individual businesses and just a couple of comments on other aspects of the financials. So first of all, the EBITDA margin. I mentioned earlier on, 30.5% margin for the half year. A year ago, we published 32.0%. However, within that, we have got the -- within the change, we have got the impact of M&A, particularly Cable & Wireless coming in with lower margin and foreign exchange. That basically takes the reported number down by 0.5%, and as I said earlier, some restructuring charges that take it down by a further 0.3%. So on a like-for-like basis, 31.2% plays 30.5%, so down about 0.7 percentage points.
I think put simply, this is about Northern Europe and investment in customer growth. It is about top line pressures in Southern Europe and it is about improvements generally in the AMAP region, particularly in Vodacom in India as I have referred to.
We are absolutely still targeting to get the rate of reduction in the margin down year-on-year again for the full year. Why are we confident we can do that? We have got the scale improvements coming through in the AMAP region, as you have just seen. Those businesses are growing faster than the average in the group and, hence, in a mixed effect, those also have a benefit. Some of the price plan changes we have introduced, we think, should have a benefit on subsidy levels. And finally, we continue to drive on a number of cost initiatives, which will bear fruit during the latter part of the year.
So talking of which, just 1 or 2 examples of things that are still going on, on the cost front. The top left here, looking at customer service, the number of calls into call centers down about 11% year-on-year, with a significant increase in the number of customers, who are serving themselves online, so up from 15% of the base and 30% in a year. The number of customers, who are solving on device has gone from virtually none to about 15% during the period.
On the top right, on the technology side, the bars there are the total petabytes of data going through the system, so up about 80% over a 2-year period. During that 2-year period, we have held the operating cost absolutely flat. And in that period, we have moved from almost no single RAN to 44% of the base having single RAN and also now got about 50% of our global sites are now shared with others. So I think really strong progress there.
Vodafone procurement company on the left-hand side, we're putting more and more volume through there. Generally, we have managed to reduce the headcount. We are increasing the savings. I think the savings per employee in our supply chain activity are up over 50% over a 3- or 4-year period. And then finally, on the bottom right, we have had the Europe and Central operating costs at around the 6.7 period (sic) [GBP 6.7 billion]. We are now targeting for the next financial year to get that down by GBP 300 million in absolute terms.
So change of tack again at Verizon Wireless. Many of you will be familiar with this, but Verizon Wireless has had another strong period. So the service revenue growth there, 7.8% shown in the chart on the top left. Net adds, contract net adds, were 1.5 million in the most recent quarter. And the business is regularly taking more than 100% of the net adds growth in the market overall.
You can see on the bottom left, the margin progression, with the business having hit, in the last quarter for the first time in its history, a 50% margin. And the free cash flow, on the bottom right, which is shown before the dividend distributions, have grown first half on first half by 24% and in the last 12 months have been $16 billion on their own and, hence, the dividend payment that we agreed last night, which I'll come onto again in a minute.
How have they done that? Focus, top left, on smartphones. So smartphones are now nearly 80% of all sales, and they're now 53% of the customer base; the spend per account, the U.S. has now moved to per-account metrics, has gone up in the bottom left-hand chart by 6.5% over that period; and LTE, where Verizon Wireless is very, very advanced, over 250 million of the 300 million U.S. population now covered with LTE. We have now got 15 million LTE devices connected to the network and about 1/3 of their total data traffic is now on the LTE network, so well, well ahead of the competition in terms of moving to LTE.
If I take a look at Vodafone, including its proportionate share of Verizon Wireless, so this is Vodafone plus 45% Verizon Wireless, then some interesting stats here. The first half service revenue would not be down 0.4%, it would actually be up by 2.2 percentage points.
The EBITDA, on the bottom left, not a GBP 6.6 billion number, but GBP 11.1 billion; the margin about 3.8 percentage points higher on the top right; and the free cash flow at GBP 4.6 billion, rather than GBP 2.2 billion. All of those being half year numbers. So very, very significant numbers when you look at it on a more global basis.
Briefly on the free cash flow, I mentioned earlier GBP 2.2 billion of free cash flow, which you can see on the bottom here. That compares with GBP 2.4 billion the year ago. Remember, a year ago, we had GBP 0.2 billion of SFR dividend as part of the exit arrangement. So actually, we have seen a like-for-like basis, about a GBP 0.2 billion reduction in the free cash flow, much as we expected. That, if you look at the top line, the EBITDA is off a GBP 0.9 billion reduction in the EBITDA, of which GBP 600 million is due to foreign exchange. So in essence, we have managed to cushion very, very significant FX effects down to a relatively small impact upon the free cash flow. And that is whilst we have maintained levels of capital expenditure, so we've still spent GBP 2.5 billion, particularly focusing upon single RAN in Vodacom, the LTE rollout in Germany and the fixing of network and the rollout of single RAN in Australia.
So overall, we've said GBP 2.2 billion. We are guiding to the same guidance range on the free cash flow, but the lower half of that range for the full year, which will mean we've generated about 40% of the full year cash in the first half of the year, which is similar to what we did last year.
Moving then on to a net debt. We have closed the period at GBP 26 billion of net debt, about 1.8x EBITDA. The opening net debt was GBP 24.4 billion, a number of moving parts in there, the free cash flow of GBP 2.2 billion that I have just talked about; the SoftBank proceeds, which we received at the very start of the half year, GBP 1.5 billion; the cessation of the previous share buyback or conclusion of the previous share buyback program, GBP 1.1 billion; equity dividends paid, GBP 3.2 billion; spectrum, GBP 0.3 billion; and importantly, Cable & Wireless and the acquisition of that, GBP 1.3 billion; with some FX movements in the other direction this time.
So overall, about GBP 1.4 billion increase in the net debt -- sorry, GBP 1.6 billion increase in the net debt. But you could say GBP 1.3 billion of that is from the Cable & Wireless acquisition.
In the second half of the year, we will have a number -- the spectrum payments going through. We will pay for the TelstraClear business, which was cleared just very recently. Obviously, we were very pleased last night to agree the $8.5 billion dividend from Verizon Wireless. I know there have been some questions about why $8.5 billion, why not $10 billion as in the previous year. I'll just leave you this one thought. The business generates roughly $1 billion of cash a month. Last year's dividend was paid out on the 31st of January. This year's dividend will be paid out mid-December. So in essence, it's being paid out 1.5 months early, so there is just 1.5 months less cash in the bank. And actually, it has maintained it at that level, despite having just spent GBP 4 billion on spectrum. So this is purely about the time phasing and the early receipt of the cash this time around. So anyway, with that GBP 2.4 billion coming in, we have committed, as you will have seen, to GBP 1.5 billion of it going back by way of buyback.
So in terms of guidance then. Guidance ranges have been left unchanged from the start of the year, albeit we have said we expect on the adjusted operating profit metric to be in the upper half of the range; and on the free cash flow, we expect to be in the lower half of the range. And the free cash flow, obviously, excludes the GBP 2.4 billion from the Verizon Wireless dividend; expecting CapEx, on a like-for-like basis, to be similar to last year and are still pushing to get the rate of margin erosion down for the year as a whole.
Now before I draw to a close, one topic I'm sure you've all been desperately waiting for, a quick update on 1 accounting change which will happen in a couple of years' time. So some may be familiar with the fact that the way joint ventures are to be accounted for is going to change in the '13, '14 year. The primary impact for us is on Italy. It does also impact Indus, Australia and Fiji, but the numbers there are not quite so significant. What it essentially says is rather than taking a proportion of the Italian revenues, a proportion of its EBITDA, et cetera and putting them into our P&L on a proportionate basis, we don't put anything in at that level. We purely go down to the net income from the Italian business and take our share of its net income and put it in the associates line, much the same way as we do Verizon Wireless at the moment.
So without boring you with all the detail, the table on the right shows that, at a published level, that will give the appearance of a lower revenue, a lower EBITDA, a higher associate contribution, some small changes on tax and interest. However, by the time we get down to an earnings level and an EPS level, then we get back to exactly the same number as we had before. There is a slight difference on cash. In the past, we have shown our proportionate share of the cash generation of the business. Under the new rules, we will, instead, show the cash dividend received by the plc.
So overall, those changes will happen a couple of years' time. We will, in the fourth quarter, give you a restatement of history so that you can see that. But more importantly, we will continue to give you pro forma visibility on Italy as we go forwards, so that broadly, you can still continue to see the full picture as you do today.
So in summary, emerging markets, doing reasonably well; U.S., certainly doing well; Northern Europe, holding its head above water; Southern Europe is the challenge for us. Hence, the big focus on costs; hence, the commitment to further improve the margin trend over the full year. Just remember, including Verizon Wireless, we're talking a business that's generating GBP 7.5 billion to GBP 8 billion of cash each year with, I think, a reasonable conservative balance sheet, 1.8x EBITDA as debt. And finally, confirmation of the full year guidance.
So with that, I'll hand back over to Vittorio.
Vittorio A. Colao
Good. So in order to discuss how we are progressing in our strategy, let me start by recapping my take of the situation, regrouped by region and on a more qualitative way.
So first of all, Northern and Central Europe. Here, I see more positives than negatives. These are stronger economies, more stable markets. We are still growing even if only by 0.7%. The margin pressure is there. There is a bit, which is, as Andy has said, restructuring. There is some A&R pressure, which, however, is mostly linked to an absolute increase in smartphone penetration, which, per se, we think is good. So it's a volume effect not a price effect. If I have to be critical, the real bad news is the collapse of the prepaid market, which goes down by 9.8% in Northern Europe, but, in general, it's a pretty solid region.
Where I see, quite frankly, more negatives than positives is Southern Europe. I still see good data growth in Southern Europe. It's 11%, but there is pressure. There is pressure on pricing coming from MVNOs and no-frills operators. And more importantly, there is clear some economic environment-type of pressure, which is very visible in enterprise. Enterprise is down almost 12% in Q2 in this region.
And then finally, the third region, the emerging markets. Reason here I really see are more positive and very important positives. First of all, as Andy has said, the EBITDA margin of this region is now 30.5%, which is in line with the group margin. And the weight of this region on revenues and EBITDA is 30%, and on operating free cash flow, is 33%. So strong performance over time growing in weight, very strong brand perception. If I have to find a small negative is that the growth is slowing, but it's still positive growth.
Now, if we take a higher level view and a more strategic view at how is the company going, the most important thing is that we continue our healthy journey towards a better revenue profile. If you look at the top part of the chart, mature voice revenues are now 35% of the total, which means that they are trending towards 1/3. And the healthier, the kind of more future-proof part, which is emerging markets and data, are now heading towards 2/3. And as the bottom part of the chart indicates, penetration of smartphones is up 50% on contract in Europe, 30%, 31% on the whole base, which is very positive because, again, indicates that the move from a metered telco to a new data company continues and continues at a good pace.
And the implication on our revenues is indicated in this chart. If you take Europe, 54% of contract revenues is now coming from integrated tariffs. You see the difference between the gray and the red bar is significantly up versus last year. And the effort that we are making is to make this happen not just in the smartphone lines type of markets, like the Netherlands or the U.K. where the numbers are very high, but also in places like Italy or Spain, where we went up significantly this year.
And as a result, on the right part of the chart, we have in-bundle revenues now 46% of the total, up 8 points, and out-of-bundle, only at 44% now. Now, within out-of-bundle, we also have some prepaid revenues, which we are bundling within prepaid. So what I'm saying -- why I'm saying this, I'm saying that the move, the journey towards making the revenue profile of the company healthier continues, and actually, in some cases, has even accelerated.
Now, of course, if you -- if I take and I share with you my view of the outlook, the clear -- there is clear rain in the short term. There is clear rain because the macro environment in Europe is not expected by us to improve, especially in Southern Europe, which, of course, is reflected in the impairments that Andy has talked about, because we don't want to take a particularly optimistic view at this stage. There is a tail impact of regulations, the MTR cuts, which are going to bite in the next couple of quarters in a significant way. There is a bit of roaming regulation effect as well. Continued pressure from no-frills players and MVNO at the price level; impact of disintermediation from IP comms players in markets where SMS revenues are still high, I can mention Spain or the Netherlands; and, in the short term, some A&R pressure more coming from the volume component of it than the price component. Here, we had a question mark on the handsets costs because the reality is that there is more choice that we can manage better our mix, but the volume of adoption of A&R is actually going up. Now we can discuss whether this is positive or negative, and there's probably a short versus long-term thing, but for the short term, I put this under the British weather chart.
But there is also a better weather that we see in front of us. First of all, the data story. The data story is good, and there is some new news here. There is an acceleration of usage of data in Europe, which we are -- or at least, we have it, which we are triggering at the customer level. iPhone usage is on a per customer usage level, up 30%; Android usage is up 25%; tablet usage is up 60%. So customers, I hope, I really want to believe, also as part of our actions and our pricing choices, are using more and more data, which for the long term is good. In emerging markets, data is more about penetration. And again, it's rising, but still very low, so there is very good opportunity there. Adoption of multiple devices, we all see more and more tablets. It's not iPad. I remember questions from many of you, is it only an iPad thing or is it a tablet thing? But now, the answer is it is a tablet thing; it is not just an iPad thing. Different formats, different price points, different operating systems, more competition, which is also good.
We continue to see good trends in enterprise favorable to us, bring your own device policies, unified communication policies, which require more assistance from our side and the good, I mentioned -- Andy has mentioned it, the good take-up of and extension into new markets of mobile money transfer and M2M and the services, the innovative services that I discussed in the previous meetings.
So our strategy needs to take care of the rain, but also make sure that we are in good shape for the good weather. And therefore, our strategy has to mitigate short term's headwinds, but also make sure that we leverage on the long-term opportunity.
Now I talked in May about Vodafone 2015 as a strategy which helps the transition from meter telco to a data company, to scale data company. This is really about leveraging our scale. This is about making sure that our growth in data is profitable, that we innovate exactly where we have the right assets and not necessarily across the board and, of course, that we improve our efficiency. So I would like to cover quickly some of the updates in the various areas.
First of all, consumer. I will talk about pricing and our pricing strategy in consumer in more detail. There are some other aspects that I will just briefly touch. It's not just about pricing and bundling. It's about differentiating the customer experience, making sure that the retail new format puts together service and sales and integrating the approach across channels. It's about improving profitability of ARPU versus A&R. I will make a few comments on the Spanish case, which I think is a passion for many of us. It's about really focusing only on services where we do differentiate, and we picked machine-to-machine, financial services, mobile advertising as the key ones, but also having the courage to terminate services. So for example, on our side, we are terminating Vodafone music. We are terminating the Vodafone App Store, because we don't see -- I mean these are very good services, but to be honest, they're not really differentiating versus other alternatives. So we need to focus our money where we can make the difference and, of course, leverage on the network investment. And I will cover that again a little bit more later.
Let me talk about pricing, because this is important. So consumer pricing, I think we have launched really over the last 3 months, a very big repricing strategy across Europe, which I would say simplifies in a radical way pricing for our consumers, but also is very focused on stimulating data usage and consolidate ARPU. And if this sounds familiar to those who have followed Verizon Wireless, I don't think it is a total coincidence.
This is about clearly giving -- providing customers with unlimited voice and unlimited SMS. This reduces the threat from the over-the-top players, because once you have unlimited voice and you have unlimited SMS, there's not a huge advantage in using WhatsApp or Skype or whatever. It's very strong value proposition because it simplifies the life, but also makes clearer -- in the chart, we say separates, the real word should be identify clearly what price is for the service and what price is for the handset or what is the intrinsic cost of the handset, but leaves the choice with the customer, which we think is right and, of course, gives larger data allowances, freeing up usage. We always have this issue of Europe being below the U.S. and both of them being below Asia and making visible what is the network quality provided by us. It also helps content owners and app owners develop apps without the constraints and give content without the constraint of how much usage will be seen by the customers as excessive and, therefore, customers would not use it. Plus, we are adding additional features to increase whatever; roaming services, shared plans, early upgrades, cloud and other stuff.
Now this is not a theory. We didn't want to talk about this in May. We are talking about this now because it's launched. It's operational in all markets. And I have to say, I don't want to give numbers today, but the early uptake, at least, in Italy and in the U.K., where we have been in the market for a few weeks for many weeks now, is I have to say really positive. There are fewer downgrades than what we thought and more upgrades than what we thought, which is good news. And, of course, customers are very, very impressed and very happy.
This is called the Red family of plans. Now, it's not everywhere Red because in some places, we have issues with the Red name. But clearly, it has been something that we have launched already in Spain, in Italy -- sorry, in Spain today, in Italy, in U.K., in Germany, in Hungary. And it would be launched everywhere across Europe.
Let me go a little bit on the right-hand because this explains a little bit the philosophy behind. Unlimited calls; unlimited SMS for all plans; data at different levels, of course, because there are different usage levels and some differentiation on speed or on cloud services given, which, of course, reflect how much data you're getting.
The important point is that there are different price points and, as you can see from the example, which is the Spanish example, different price points are different depending on how much subsidy, as we call it, but at the end of the day, on the price of the handset, which is included with the phone. So if you want a SIM only, you can get it for EUR 35, unlimited, all inclusive of data. If you want a nice phone, you can pay a little bit more. If you want a very nice phone, EUR 55; and if you really want an iPhone for free and be able to do whatever you want, you go to the EUR 70 tariff.
Again, these prices will be different by market. They will keep changing, but we really think that, as you recognize, it's very similar to what has happened in the U.S. recently. And we think it's the right way to address the switch from the old metered world to the new data world.
Now in emerging markets, of course, the data game is a little bit different. Now here, penetration is still low. It's 22%, as you can see on the chart. There is a great opportunity if you think that in South Africa, we have 18 million data users with 58 million customers. You can see how much we can progress. In India, as Andy said, we have 30 million users, but only 2 are on 3G. And there is a big demand and now, low-end phones are available. So we see this as continuing, as a continuing phenomenon.
We are expanding our footprint in emerging markets through partner-market agreements. Last year, we did Connexus. This year, we did Zain, which is Saudi, Bahrain, Kuwait, Jordan and Iraq. And we will continue, of course, to expand our financial services presence with the deal with ICICI in India, with the ability to do international remittances and to really bring to these markets financial services, basic financial services, which are data, non-voice type of revenues, but with a very high value added.
Now, if I move to enterprise, I don't want to call it, enterprise in great detail, because we had a specific day a month ago. Clearly, it has been an area of success in the last 3 years for Vodafone. We want to build on our strength, which basically are 3. We have a very good geographic footprint. We have a fantastic customer account coverage internationally and we have the ability to serve customers now with platforms, which are multi-countries, so several of the platforms that serve enterprise now are shared across our countries.
We already talked about these things a month ago, but basically, we want to accelerate One Net and the IP-VPN. It's an area, which is growing 15%, so it's good for us. We are accelerating machine-to-machine, also going into new verticals. We've been fairly successful getting big customers in -- growth is 22%, 23% here in the traditional vertical sectors. Now we want to expand larger than that, keep growing with Vodafone Global Enterprise, 5% growth, so still -- in the first half, still pretty healthy and probably the largest, as I said, international account base in the industry. And, of course, leverage on Cable & Wireless cloud and hosting services and expanding our catalog to include also these capabilities. So I will not go into the details.
The one thing that is relatively new is we decided to create, given the strength that we have in enterprise, given the arrival of Cable & Wireless and the ability to work now on a cross-country basis, we have decided to create a group enterprise division at my level, at group level. This will have 4 verticals dedicated to the areas that I just described: global enterprise, carrier services, machine-to-machine hosting and cloud. These will be full worldwide business units with presence in 50 markets worldwide. We will, of course, continue to have centralized development of platforms and product management and, of course, all the markets, enterprise business units that continue to be part of our opcos.
In terms of strength, this is, I would say, 2,500 people working on the verticals and another 7,000 people about working in the market. So it's a pretty, pretty big presence in the market that we want to continue to leverage. Final point, this mirrors the Verizon organization, and it will make it easier to work with Verizon business worldwide.
A few words about network. Of course, we need to ensure the readiness and the capability of our network for our future. So Vodafone 2015 is really to put the company in good shape after the rain for the big data growth. Network is essential here. As Andy has said, we have good growth of data, 53%, actually reaccelerating after the past, with traffic mix moving, as I said, to smartphone and tablets out of mobile broadband.
I always report these numbers because there are always questions: "Are you really able to cope with this?" The answer is stable network utilization, 35%; stable percentage of sales, which reached saturation, 6%. As I always say, these are not the same sales as 6 months ago. They keep changing because we keep investing. We are now using, to give you comfort about our capability, we are using 51% of our second carrier and 7% of our third carrier. So we have a lot of radio capacity, which we can still add at a relatively -- actually, at low cost. And we have 91% data coverage. Interestingly enough, we now moved up 13 points to 30% of our sites in Europe being at 43.2 megabit per second, which is a very good speed, but also especially important the very high capacity that we can give. And 44%, as Andy has said, of our network is already single RAN. So the radio part of the network is really not only very stable in its performance, but also able to accommodate much more at a marginal cost. Hence, the comment that Andy made about the stability of our CapEx in the future.
The other question that I often get on network is always: "Yes, yes, this is very good, but what about the backhauling, Vittorio? You will have a problem with the backhauling from the base stations," which probably is an integrated whisper that some of my friendly competitors must have made. And let me say how we respond to that. This is a bit of a conceptual chart, but we basically said, okay, we said to Steve, "Steve, put on a site everything that you would really would like to have." So put LTE, but not just LTE, LTE at 26 and also 800, so that you have coverage and capacity, and put the maximum amount of megahertz that we can have, 4 blocks and 2 blocks. Then let's also put 3G because a lot of customers have HSPA, and let's put 3 carriers at 2,100. And let's also keep a little bit of 900 because, of course, some people will also have 900. So what's the total capacity that this site will require? Let's also assume that we have 3 sectors, and this is really probably Steve Pusey's Christmas tree, because there's also a lot of people around it that are using on an iPad, watching a video, doing all of them the same thing at the same time. This is, of course, a theoretical case, but let's assume. And the total is 930 megabit per second continuously required.
Now the capacity of a high capacity -- the capacity of a microwave backhaul to take out of the traffic from that site is 1 gigabit per second already today. In how many places do we have already that capacity? 47% of the places and, of course, we continue to improve. So this is to say we are -- and we have never cut CapEx, we have always progressed the network investment to accommodate the capacity needs that we see 1 year down the road. And, therefore, both on the radio and on the backhauling side, we think we are future proof.
We continue to deploy LTE. As Andy have said, in Germany, we have 42% coverage. We have it in Portugal. We have it in Italy. We have it in South Africa, and we have -- are almost ready in Romania, and we will continue to build. But our network is able to accommodate this new capacity requirement coming.
And then final comment, cost, operations. Here, there is a long-term component and a short-term component. After having worked hard on network and making good progress there, we think it's time to move on IT. The convergence of price plans and the convergence of usage on data is enabling us now to tackle the IT complexity. We are working to eliminate IT legacy, to go to single IT stacks, progressively, of course, not in a single move and to move to common operation processes. This means avoiding replicating IT investments across Vodafone. This is clearly longer term. And then, of course, we also need to do some short-term actions for the rain that I described before.
On the -- 1 word on the long-term action, the example comes from the U.K. In U.K., we are halfway in the introduction of what we call, Newco, which is really a simplified IT system. Just to give you an idea, we are going to move to -- from 5,000 price plans to 500 price plans, which is across consumer and enterprise, prepaid and everything. I know it sounds a lot, but it's still much less than before. We are moving from a view of the customer, which was SIM and device-based to a view of the customer, which is account-based because customers will have more devices, and they will have families and other things. This is why, for example, Verizon Wireless talks about ARPA and not ARPU, because it's per account and it's not per unit. We are integrating all the channel views, which is simplifying, of course, the way we manage the customers, making all the policies simpler, more adaptable to their specific needs.
Just to give you an idea, in the U.K., we had 30 ways of returning a handset. Today, we're moving to only 6. And again, why do we need 6? Because there are, unfortunately, 6 different channels. But this is clearly a great long-term cost simplification. This will take time, so I'm not going to overemphasize its importance in the short term. But in the long term, this is basically the equivalent in IT of what we have done in network.
However, we also have a short term. Andy has described we need to make sure that next year, we weather any kind of possible pressure, especially in Southern Europe. We have kept OpEx stable in Europe. We now want to go down in absolute terms, and the target for next year is GBP 300 million delivered, not GBP 300 million gross. This is going to be, again, continuation of the network. Work, going not only to only 2 network management centers in Europe, which is already the reality, but also moving to single-engineering teams, reducing legacy CapEx, moving more to the business IT component, as I described, increasing from 7,000 to 11,000 in the long term the number of people that work in our low-cost, shared low-cost high-skilled shared service centers. And, of course, thanks to the introduction of homogeneous IT systems, reduction of coordination cost by 10%. And this is again to mitigate the short-term winds that we have against us.
One final word on convergence, which again is another area that is often discussed; what's our strategy here? First of all, a few words about the new European approach to NGN. The new European approach, which is not yet fully finalized, but has been stated, is no cost orientation on NGN, but price squeeze test and the quality of input test to be passed country-by-country in order to be allowed not to have a cost orientation.
We have discussed with incumbents. We are discussing with incumbents. There is a little bit of a mixed reaction here. Some say, "Well, maybe we can share, maybe we can improve the return on our assets." And they are more open to this, and some actually, quite frankly, are de facto, refusing the access and saying, "If I invest, it's my own stuff."
In enterprise, we found it easier to acquire and put together assets because again, it's a market where wholesaling and integration is more culturally normal. In residential, clearly, our intention is to have a combination of LTE, DSL, VDSL and fiber cable to provide our customers with services.
So our strategy here is: First, require a fairly rigorous application of the 2 competitive tests to NGN and access infrastructure in all markets, which means that we will be very vigilant with incumbents and with authorities on that. If needed, we are willing to co-invest with other telcos and deploy our own piece of NGN where we need the access to bandwidth, continue to strengthen our unified communication offer to enterprise by putting together assets. And if value creating and needed, we are willing to acquire assets to get bandwidth.
Now this is a country-by-country story, different positions, different situation will require different strategies. Not a lot of read across from different markets, but a strong strategy of continuing to provide whatever is needed by the customer when demand is there.
On shareholder returns, this continues to be our focus. If you look at the chart, we have returned to shareholders from September 10, GBP 18.1 billion. And if you add yesterday or today, where there's another GBP 3.1 billion coming either by dividends or by share buybacks. The 7% growth for the third year of the 3-year plan has been confirmed, and Andy has illustrated the strength of our balance sheet, which will facilitate investment in spectrum acquisitions. And, of course, we see the Verizon dividend as a nice way to increase shareholder returns, but also preserve flexibility to reduce debt and support investment.
So as a conclusion, 6 points: continue the growth in data and emerging markets now with mature voice trending down to 1/3 of the total service revenue; very important new strategic approach to consumer pricing and bundling in Europe; strength and commitment to enterprise and expanded product catalog there through a new dedicated division; continuing consistent investment in network without too much ideology in technology, but with pragmatism in how to serve in the most efficient way the data needs of our customers; drive toward standardization, simplification and cost efficiency; and, of course, a strong orientation towards maintaining strong returns to shareholders as a priority.
I thank you for your attention. And now, I would invite my colleagues to join me for questions. And Tim starts.
Question-and-Answer Session
Timothy Boddy - Goldman Sachs Group Inc., Research Division
It's Tim Boddy from Goldman. A couple of questions, if that's okay. The first one, topically, on your relationship with Verizon Group, if you could comment a little. Obviously, as I think Andy noted, some people could look at the smaller dividend and see that as an indication of future intention. So if you could just talk about that relationship and where you think it now stands. Secondly, in terms of your comments around convergence, Telefónica noted in their results, for example in Spain, they're seeing a very strong inflection in their add momentum on the back of their Fusion tariffs. I just wonder if you could talk a bit more about how you intend to react to these converged offers and also, whether you'd consider, I mean I know you hinted at it, joining, either the Jazztel, Telefónica fiber rollout in Spain or the FASTWEB, Telecom Italia fiber deployment in Italy?
Vittorio A. Colao
Yes, let me -- first of all, the relationship with Verizon is good, is very good. As Andy has noted, we see other 2 distributions: 1 in February, 1 in December. The second one is a little bit smaller because of the 1.5 months earlier data. We are accommodating their needs. We are accommodating -- they are accommodating ours. We work together well on the areas of co-operation. If you want, I don't talk about many new areas of co-operation, because honestly, they could mean the same. So we purchase together, we look at customers together. We discuss about 1 day, maybe we'll buy terminals together, but today is too early. And I mean it's more of the same. It's delivering good value, and I think it's a great relationship. We are very pleased with their performance, I have to say, and a bit jealous of their pricing. But we are moving, as you can see, so positive. On Fusion and convergence, listen, we are clearly watching. We are clearly -- we immediately matched their offer, so they went down; basically what was available from them at EUR 65.70, now is available at EUR 50. We immediately matched. I think it took 1 week to match. Whether this will create a trend in the market or not, we will see. In the consumer space, clearly, we want to deliver what we need to deliver to the customers. And whether we will join Telefónica and Jazztel or do something else, quite frankly, it takes 2 to dance, we will see. As I said, some incumbents in Europe see this as well, maybe, there's an opportunity to kind of all go together and improve the return on assets and going to some kind of sharing. Others say, "No way." Telefónica is more probably in the no-way camp. And if that's the case, we will ask -- we'll take a very strong regulatory position, but eventually, we will have to make moves ourselves. It's a very -- very market-by-market type of approach. Yes? Let's do Simon here and then we move there.
Simon Weeden - Citigroup Inc, Research Division
Well, I wondered if you could -- Simon Weeden from Citigroup. I wondered if you could elaborate a little bit more on Germany, where your relative share in terms of post-pay adds got quite a lot worse in this quarter versus the quarter before. And perhaps, in respect of Germany, and certainly, in respect of the group, could you talk a little bit about the outlook for growth in the second half given the quarter disappointed a bit against consensus. Are we going to see a sort of underlying further deterioration and will the price changes that have mostly been late quarter, late last quarter, early this quarter, will that have an impact? Is there a timing issue we should keep in mind as regards the adoptions of Vodafone Red tariffs in Europe?
Andrew N. Halford
Yes, sure. Yes, the Red plans, obviously, coming out have not particularly been picked up in the last quarter, so the strong hope is that we will now see the benefit of that coming through over the balance of the year. So time will tell, but hopefully, we'll see the revenue pick up a bit more on that front. The customer growth was a little disappointing last quarter and, in some respects, it was sort of in preparation for getting the new price plans actually launched out in the market. So we'd hope that, that will address both of those points.
Vittorio A. Colao
James [ph], yes. And then we'll go back there.
Unknown Analyst
Could you say a few words about how you look at a normalized spectrum cost when you're calculating the underlying free cash flow of the consolidated group? And then also on spectrum, can you just say what your base case is for re-securing your 2G spectrum in Italy and also Germany in a few years' time?
Andrew N. Halford
Yes, trying to do to normalized on something that is as lumpy as spectrum is not the easiest of things. I mean, our internal planning clearly is done on a country-by-country basis as and when there is either new spectrum or renewal coming up. As best we can, internally, we'll take a view as to what we think it is going to cost, but that of itself is not easy, because in advance of knowing the rules, in advance of knowing the number of competitors, et cetera, in an auction, there is still a fair amount of guesswork that goes into it. So what we've tended to do is run the balance sheet, I think, reasonably cautiously. The last 2 years and this next year are probably the peak of 3 years in spectrum since about 2000. We did sell some of the businesses. We did retain some of the cash in order to do it. And my hope would be very strongly that we'll come out of this 3-year period with the balance sheet in good shape, having bought significant amounts of 15, 20 years spectrum. And then we will just be down to the occasional renewals, some of which, I think, may be more paid for on an annual basis, rather than being paid for upfront. So hence, when we get more clarity on that as well, it'll give us a better basis for going forwards. But it is probably the most lumpy cash item we have got in the group.
Vittorio A. Colao
And if I can make a general comment, I think that there is a little bit of an increasing awareness around the world that the lemon cannot be squeezed too much. So we start seeing rules, which make more sense in the options, we start seeing approaches, or at least, in some countries, approaches, which are more mindful also of the fact that in the end, this is an industry that creates a lot of economic benefit outside of it, just the pure intake from the auctions. Early days, but not as bad probably as some of you thought a few months ago, probably. Yes, there, then Robin, then -- yes?
Nick Lyall - UBS Investment Bank, Research Division
It's Nick Lyall from UBS. Could I ask 2, please? Just on Spain, firstly, are you seeing any signs at all of regaining momentum given the new tariffs and the reintroduction of subsidies? And then secondly, back on Verizon Wireless, should we now view the payments as being more frequent than annual payments? And over any general period, should we also expect to be receiving more from Verizon Wireless rather than less versus of the $10 billion?
Vittorio A. Colao
Yes, let me take the Verizon question. Maybe this is an opportunity for Paolo to talk a bit about Spain. Sorry, I would like maybe introduce Spain and then you talk about Spain. So on Verizon Wireless, I think honestly, I don't want to comment too much about the future, because we always said, and we have been saying this for the last 4 years, this is a company, which is very well managed. It creates a great amount of cash flow, and both shareholders work in the interest of the company. So we have been very accommodating on a number of issues when they need investment. And we would be accommodating on whatever schedule is necessary for them. Keep in mind; this is a Verizon-managed company. This is not a Vodafone-managed company. But I think it's a very, very positive relationship. I cannot comment about the future, but I can only say that again, we have demonstrated today, or yesterday actually, that when cash spikes up, cash gets paid, and it's relatively simple. It's the amount of cash, which is very good. On Spain, on Spain, I have a general comment, then Paolo can probably expand a little bit. On Spain, we have -- there was a lot of excitement about elimination of subsidies. We followed. Clearly, not the whole market followed, and it didn't really work. What we also found out is that some customers, a number of customers actually like to pay more for having the ability to have an answer and changing us then do that. So the real issue in Spain is the pricing of the price plans when you also get the answer how much higher they are versus the SIM-only one. That's the real issue. And we moved into a new scheme that I have illustrated, which I think gives the customers the choice. They've got GBP 35 if they want without, or GBP 40 or GBP 50 or whatever, GBP 70, depending on what they get. It's more about the choice and the pricing levels than an ideology of taking out or leaving in subsidies. Paolo, do you want to be more specific?
Paolo Bertoluzzo
No, I think you said most of it on the subsidies cash on -- in terms of trends and performance and recovering there. I think since when we did reintroduce, on a promotional basis, subsidies at a lower level than before, in the summer, we have regained speed in terms of gross additions, and actually, became leader in market share on contract cross additions even if it was partially balanced by changes in regulation on the retention side of the business. I think it is clearly early days to comment on performance on the Red portfolio and the new approach there. I would add to the launch of the Red portfolio, what we are doing in the youth space where we're actually launching prepaid, very, very interesting and competitive tariffs with a completely different approach, which is somehow giving more value to the customers with a good entry level ARPU. And that's another important part of our strategy in Spain.
Vittorio A. Colao
There's Robin, Will. Yes, Stephen and then I come there, yes.
Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division
It's Robin Bienenstock from Sanford Bernstein. It seems to me that the risk for you with incumbents having to roll out more fiber is that they're going to get a bigger and bigger share of the higher-value customers with lower churn through integrated offers. And I guess the risk is that you become a high-cost wireless operator, with diminishing access to the best customers. And so I'm wondering how you've more fundamentally addressed this, because Red, if I look at it, addresses the problems of the past of wireless data and how to monetize wireless, but it doesn't really address the more fundamental risk.
Vittorio A. Colao
It does. You can get a fixed DSL bolt-on as one of the ways to go up, which is why I said we matched the price.
Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division
Okay. So I guess related to that then, 2 questions around my concerns. One is are you not a relatively soft target when it comes to regulation as you are the odd man out in most countries and indeed at the EU? And two, do you have the right organizational structure to allow you to really drive a much leaner organization, to deal with this sort of competition that you will likely deal with in the future?
Vittorio A. Colao
So the second question is kind of an open-ended theoretical question, but let me first get the first, and then I will try to give an answer to the second. The Red is a part of our strategy. One of the components of Red in Spain is specifically also getting, as part of the plan, fixed DSL asset. The point that you still have which is valid is access to fiber. So once the market moves to fiber, if it moves to fiber, my information is that most of the connections are still on the 15, not on the higher level in Spain, but maybe I'm wrong, once it moves there, what happens? First point; keep in mind that regulation, contrary to what you say, actually, we are the darling on prices because we are only one that can really make sure that the countries behave. And so once we get there, the price squeeze test and the quality of input test have to be passed. Otherwise, those offers will not be legal in the European framework; first answer. Second answer, my job is not to hire lawyers to stop the others from doing what they want to do. I slow them down until we get what we need to get, which is going to be either access to their NGN or our own access to somebody else. There's cable. There's the possibility that we might decide to build ourselves somewhere, maybe with some of the others. There's not just incumbents; there's also other people in the market, who might have exactly the same interest. So I think that the picture that is being painted by the incumbents is a little bit -- it's very well coordinated, which tells you something. But also, it's a little bit too rosy, at least, relative to the timing. On the second question the kind of -- are you -- do you have the right -- I don't know what you refer to. As I said, our strategy is market-to-market. I think we have been doing different things. In Germany, we are deeper in fixed line; in other places, we are deeper in enterprise. In other places, enterprise is more mobile with third-party assets. So we have different strategies by market. I don't think that leveraging the cost advantage that we have is the wrong thing. So I'm not sure exactly what you refer to.
Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division
If I may, what I'm referring to is the fact that you talk about scale in your business, but you don't actually end up with better margins than peers in most of your markets. So what I'm asking is, is it right to focus on the economics of the individual countries and to have a cost structure that replicates an awful lot in each individual country? Or should you think about your group organizational structure being really quite different in order for you to be leaner?
Vittorio A. Colao
Yes, again, difficult to say should I not want to be leaner. I would just say that we want to reduce GBP 300 million of cost, 10% of coordination cost. But on the other hand, if I can share a big part of my IT cost, if I can share my network cost, if I can share what is not customer facing or not heavily customer facing and get an advantage, I think shareholders are happy if we do it. Life is not black and white. I said Bill, Stephen, and then we have to go there. Yes? I saw you.
Will Draper - Espirito Santo Investment Bank, Research Division
It's Will Draper, Espirito Santo. One on cash flow and one on the U.S., if I can. On cash, you missed consensus free cash flow a little bit in the first half. So can I ask you what's consensus getting wrong on phasing? And what's going to come back in the second half that wasn't there in the first half? Might that -- that might be CapEx or working capital, but just something on the phasing of free cash to get you to the guidance number? And second, on the U.S., we've seen a couple of quite big deals recently. One involving DT, one involving Sprint. Just if I could ask what -- how you think that makes life at Verizon Wireless easier or harder going forward with the changes in the U.S. market structure?
Vittorio A. Colao
Andy, you take cash, I take...
Andrew N. Halford
Yes. So I supposed 2 thoughts on the cash flow. One is, with all due respect, it is difficult for an outsider looking in to get consensus on cash flow accurate, because there are a lot of one-off items on tax and things like that where the phasing is less visible. However, the second point, which is the more substantive, is the largest part of our capital spend typically, for various perverse reasons, takes place in the last couple of months of each financial year. And that seems to be a truism of many telcos. The actual payment for that will typically go out in the first quarter of the following year. So actually, the first half tends to be weighed down by the previous year's CapEx, and the second half gets a benefit from it. So that is why you tend to get this higher cash generation in the second half than in the first half.
Vittorio A. Colao
Yes, a comment on the deals in the U.S. Okay, the T-Mobile deal, with all due respect, is a fine deal, but it's not a game changer in the grand scheme of things. Sprint, SoftBank is more interesting. Again, I think very highly of Masa and his entrepreneurial ability. You have to keep in mind that the distance between Sprint, even Sprint with cash, and Verizon Wireless is pretty big. It's a different situation from Japan. The Board of Verizon Wireless has immediately received the analysis from management on what they can do and they cannot do. But there are some differences. I mean there is a kind of coverage and technology difference, which is very big, and the pricing in the market, at this moment in the U.S. is totally different from what it used to be in Japan when Masa took over. So with all -- I think very highly of him, it's -- wish him good luck, but I don't think in the short term, it will really be a game changer. But Verizon Wireless management is very focused and very alert as you would expect from such a successful group of people, so interesting to watch. I think we had Stephen, and then I need to go to Andrew. And then, yes, back there. And then I would come back here.
Stephen Howard - HSBC, Research Division
Stephen Howard here at HSBC. Couple of questions. Firstly, obviously, the Red tariffs look quite interesting. But I was wondering whether you had been tempted at all to be still more radical. And in that vein, just interested to know what you think of Swisscom's recent tariff initiatives where the segmentation is done purely on speed rather than the caps. Second question relates to the first of your points in the list of strategy objectives, namely to become a -- or to be a scale data company. Obviously, that's laudable, but I think it's fair to say it's proving difficult to demonstrate traction there so far. I guess what I'm concerned about is are you not worried that some of the network sharing arrangements that the industry has come to and the terms on which wholesale is made available, is there a risk that those factors have effectively undermined the opportunity here? In other words, that everybody in the market winds up thinking they're a scale data player?
Vittorio A. Colao
Can you remind me the market share of Swisscom, please? Because I think there are some differences. I mean Swisscom, I don't know, I -- they're a partner in market, I should know, but what do they have, 56%, 60% market share? So you cannot exactly compare how radical you can be when you control 60% of 1 market from when you don't control 60% of our market. We looked at a variety of options. We were very -- also very mindful of what's the departing point, which is why the pricing levels would be different by market. Eventually, being a scale data company means we move from a meter, the classic telco mentality of premium pricing and scarce network provision to thick network precision and ARPU focus, which is a totally different type of company. It is a journey, as I said, because we are going there, but we still have 35% of our revenues, which are kind of mature, highly -- relatively highly priced voice. But the fact that we progressed enables us. The more we go along, the more we can do new things, which is why I'm very excited and very optimistic that the fact that despite the short-term difficulty of evolving, Vodafone is doing the right things for the future. And we are really getting ready for the future of data. On the wholesaling, scale data thing, I think you have absolutely a very valid point, and we are very aware of it. We are very aware that every network deal, every wholesale deal that we do has to pass some tests to make sure that we are not undermining our own strategy, which is why now everything has to be approved at the Executive Committee level, so that we are sure that we are not trading off the short term for the long term. You have a point, and we are aware of it. I think, Andrew, then we go back there and yes. We go that side, please, a bit and then we come back here.
Andrew Beale - Arete Research Services LLP
Andrew Beale from Arete Research. A couple of questions around investment, if I could. You were talking a bit about the Global Enterprise division and how you saw that developing over time. I mean it sounded a little bit like there were some -- there might be some more capabilities that you needed in individual country operations to do that. I mean, perhaps, hosting capabilities in some of the geographies. Just wondering if you can talk a little bit about the investments that you might need to build up that global capability. And more broadly on investment, and I guess if I look at some of your competitors, I think it's increasingly likely that we're going to see rights issues from a bunch of them, as they need to sort out their balance sheets as their EBITDA declines a bit faster than they originally expected. I just wondered what your inclination is to start to put your foot on their throat a little bit more, to up the investment, to go for -- to try and create a sustainable network advantage, which might help your margins to perhaps, push into LTE, to drive fixed network substitution in the sort of 25% that might never get fibered; that sort of area to try and drive returns on a longer-term view?
Vittorio A. Colao
Do you want to take...
Andrew N. Halford
Which one?
Vittorio A. Colao
Well, I take the final point, to put the foot on the throat, I like that.
Andrew N. Halford
Okay. Well, let me start on the enterprise. Clearly, we see capability and potential in that space and, hence, the new organization. I think, compared with most of our competitors, we have got a spread and a control of network inputs that puts us ahead of the pack. Cable & Wireless brings some new skills, and particularly in the sort of hosting space and then starting to think more about cloud. There clearly is opportunity there. Now whether that's going to require sort of investment to acquire business or not, I think it is early days to say. I think we need to understand what we have got and what the capability is to move that forward organically. But certainly, in those sorts of spaces, we do see reach into new revenue pools that we have hitherto not been able to go for.
Stephen Charles Pusey
Yes, just to add to that, Cable & Wireless brings us some interesting and attractive additional product suite consistency, IP VPNs and hosting and just cloud, as you say. Some of the skills that we need to expand upon are the people side of things; the delivery capabilities and execution speed; some of the IT tools to make that consistent across all our properties as we standardize IT and some of the project management and the basics to get in a scale business rolling faster. So a nice set of product assets that we're acquiring. It's now the people and volume to get that rolled out as scale across all of our properties that we'll be adding to.
Vittorio A. Colao
Yes, I integrate this question and then get to the second one. Enterprise is a journey. It's very important. When you talk about cloud services, I mean, cloud services is a massive type of thing. Do we want to get into software-as-a-service? I kind of doubt, to be honest. Do we see a strength in infrastructure-as-a-service for SMEs and the customers that are served by the 7,500 people that we have in the field? Absolutely, yes. And then on platform-as-a-service, I'm not so sure, but again, it depends by market because in Germany, we have a certain position and in U.K., we have another one. In U.K., it's easier to acquire capacity and capabilities from third parties who lease stuff. So the answer will not be a totally homogeneous answer. Back to Robin's point, every market will have to come up with -- given the catalog that group will make available, every market will have to come up with some kind of different thing, but everything that we can share, we will share. And this is a bit the reason why we need to put all these resources together to get maximum traction there. On the foot on the throat, I mean it's a very tempting and fantastic image. I don't think it's unfortunately as simple as that, in the sense that yes, we are using already ideas as a very powerful substitution in Germany, and we will use it. We launched in Italy, we launched in a number of other markets. For sure, Portugal is the next one. For sure, South Africa, in a complementary way, will be very important, so answer, yes. It's not just LTE. It's also HSPA+ plus, which is, in some environments, very competitive. Do we see the opportunity to increase investment? I would say, selectively yes, in some markets, but very selectively. Because we also have to take into consideration the fact that it cannot be a strong price-driven attack, because we have seen what happens when you do strong price-driven attacks into oligopolies that basically people just reset the profit level 1 level down and my objective is really to create value and not just to gain market share in absolute terms. The -- can we afford it? I think Andy said, I think we have a coverage of 1.8 now. So our debt level has nothing to compare to most of our competitors. We have money coming from the U.S., part of it we give it back, part of it, as I said, can be used for funding these investments. So we are in your space. I wish I could use the same iconography that you use, but unfortunately, I don't think the foot on the throat is exactly what we want to do. It's more of a progressive journey of gaining share and gaining traction. Now, I need to go down there and then I come back because you've been very patient for very long.
Ottavio Adorisio - Societe Generale Cross Asset Research
Ottavio from Société Générale. I've got 3 questions if I may. The first one is on pricing. Your strategy is pretty clear, but it looks pretty good on the spreadsheet. And when I look and try to make a few numbers together, what I see is that volumes in the most challenged part of Europe, Southern Europe, is actually going up. Italy year-on-year is 2.1%. I look at revenues, even excluding MTRs, it's down 8%. It looks to me that you have an issue of pricing more than probably macro over there. Similarly in Spain, volumes are down there 2%, but MTRs, taking MTRS out of the equations, 10% service revenue down. Again, it looks to me an issue of pricing. Data, of course, is going up on volumes. You don't disclose any sort of metrics how much it's going up by country, but I believe that volume is going up anywhere, service revenues, deteriorating. So it looks to me that it's an issue of pricing. You come with right [ph], so what's happened if I really want to sum up on my side, you throw up everything now into unlimited voice, unlimited SMS, so what's happened next if ARPU doesn't stabilize? Have you now shoot all the potential opportunities you can to stabilize ARPU because you're ready now to give everything now for a fixed price? Then, two questions, a bit more straightforward for Andy. The first one is on restructuring cost. It's good that you actually give the breakdown of restructuring cost for Germany, but reading the press release of full year last year, there was also another restructuring cost in Germany, but I didn't see how much it was. So if you can tell us. And the second question is on depreciation. Now again, you're one of the few, probably the only one telco that has a guidance on EBIT. Therefore, unfortunately you have to track what's happened to depreciation. Your depreciation is down 8% year-on-year. Amortized intangibles is down 28%. So first of all, what's going on there? And second, if you give a bit of color for the full year on how -- which sort of number you have to pencil down for depreciation?
Vittorio A. Colao
Good. I'll take the question on pricing and I'm glad to pass the question on depreciation to Andy who has now time to prepare. On pricing, a couple of points; first of all, everything you said is, let me say, directionally right, but don't forget the impact of MTRs, which is particularly heavy for us because, of course, we lose the mobile component, but we don't pocket much of the fixed component or at least not as much as people who have 60%, 70% market share. So once you take the MTRs impact out and in a couple of years from now probably it will be totally out, then you get, quite frankly, a different picture, first point. But this is kind of a tiny point. It's not the big answer for the long term. But at least it mitigates the sense that you transfer of, oh my god, this is a lot of work for nothing, which is -- basically is what you said. So first point, take out MTRs, look at the broader situation. It is less bleak than what you describe. Second, long-term Red pricing; look at the U.S. case. This is -- and we are really convinced this is about ARPU. This is about increasing the revenues that you get from the account one day, the family, the company, and so on, more than the individual metered pricing. On the reason why the whole industry is actually on a -- in a difficult trend is because we priced voice very high and we priced data very low. Now we all know, it doesn't take to be an engineer, we all know that actually the whole telecommunication infrastructure is more into data. And, therefore, if you price voice high and you price data low, you are bound to years and years and years of decline. What, in many markets, Swisscom was mentioned, but Verizon can be mentioned, but the Asians can be mentioned, is happening is actually people see the transition to smartphone as a great opportunity to say, "Instead of giving me, what, at EUR 12, EUR 15 per month, you give me EUR 20, EUR 25," you give me EUR 40 if you want an iPhone but that's another story, and then you can really use this thing as much as you can. So there is a lift up of the low-spending customers, which in the long term is very healthy. Of course, in the short term, you have some kind of wobbles. I remember when Verizon launched in, what was it, June -- May, June last year, there were same type of objections but eventually, it's working out. So I really think this is future proofing more than small adjustments that we can look at. Now, on depreciation and amortization?
Andrew N. Halford
Yes, so restructuring is your first one. Second half, I haven't got numbers with me but by memory, we took a slightly higher charge of EUR 70-or-so million on the restructuring, but it was a second half charge last year, so first half on first half this year has got a charge in that wasn't there a year ago. The depreciation in intangibles; depreciation, that is an FX impact because, obviously, we're having to translate euro-denominated depreciation charges back into sterling. And on the intangibles, I'm just trying to think, the impairments for last year may have had a small impact upon the impairment charges, but I will have to come back to you on the detail of that.
Vittorio A. Colao
John Karidis - Oriel Securities Ltd., Research Division
It's John Karidis here from Oriel Securities. Two questions, please. What needs to happen for Vodafone to start moving to shared data plans? And then secondly, next time Verizon gives out a dividend, how will you go about deciding whether to pay it out as a special dividend versus doing a buyback? What are the issues that you'll look at, please?
Vittorio A. Colao
On shared data plans, there's a lot of different ways of applying them. They have a lot of different theories and it just take -- to your point, it just takes -- sorry, well, there are pros and cons and different things. The advantage is that we have inside views of what's going on in the U.S. and, as I said, it will be a market-by-market decision where and how, most importantly, to launch the shared plans. So I cannot give you a blanket answer because, again, we need to do what is right for each market condition.
John Karidis - Oriel Securities Ltd., Research Division
Vittorio A. Colao
I'm not -- I'm never talking about commercial initiatives ahead of them. I always talk once we have launched.
Andrew N. Halford
And on your future Verizon dividends, the way I'd look at it is this. At a point in time when we know we've got the dividend coming, we will have a look at the cash flows of the business, the debt level in the business, future spectrum or otherwise requirement and basically put it all into the melting pot. A year ago, we concluded that we would do it by way of a special dividend return. We already had a very significant buyback program underway at that point in time. This year is different. Clearly, the previous buyback programs had finished. All of our returns were completely dividend-related and our view was that actually to do some buyback and get the share count down was probably a good thing to do this time around. So I think it is very much going to be at points in time. In the next 12 months, hopefully, we'll go through, back to the previous question, the rump of some of the spectrum purchases, so that will be clearer. Hopefully, our stance on India and the tax there may become clearer. And maybe, in a positive way, we'll see what happens there. So I think we'll just have to judge it at that point in time.
Vittorio A. Colao
Yes, I think we need to come back here, yes. Then...
Christopher Nicholson - Oraca Ltd.
Christopher Nicholson from Oraca. I wonder could you give us a little bit of refresher on Australia, where you are on that and just remind us what the problem is with the brand perception in the Australian market.
Vittorio A. Colao
We have year Nick Read, CEO for emerging markets and Australia. Australia, not properly emerging.
Nicholas Jonathan Read
Yes, so what I'd say about Australia, I think we have said several times for the last x number of quarters what we'd been doing operationally in terms of network, service improvement, et cetera. So I won't go through all of that. I think what my boss says on a regular basis is, "But is it translating into commercial performance and financial performance?" So just focusing on that, so if we take telecoms Ombudsman's complaints, they're down by 2/3 from the peak. If we take contract post-pay handset churn, it peaked around sort of mid-30s. It's now mid-20s and improving. Prepay active base is now stabilizing. So the really important data point is service revenue quarter-over-quarter. Quarter 1, we were down 4.5%, but this quarter, we've stabilized. So we're virtually flat quarter-over-quarter. So what I'd say is customers are starting to understand that there is a material improvement in the network. We've made good advances in the quality. Stabilizing revenue, improved customer value management is improving our A&R metrics and, of course, you heard our restructuring. So my view is next fiscal year, starting to get back into the double-digit EBITDA margins that we expect.
Christopher Nicholson - Oraca Ltd.
Is it still core? Is it still core to the business, Australia?
Nicholas Jonathan Read
Is it still core? Our job is to turn around the operations. So we're absolutely focused on that. We've got a great management team under Bill Morrow. So I was down there July. I was down there September. I'm meeting again in November. I think that shows how much time and attention it's getting.
Vittorio A. Colao
Jerry and Justin and then -- if you raise your hand, I try to.
Jeremy A. Dellis - Jefferies & Company, Inc., Research Division
It's Jeremy Dellis from Jefferies. Two questions, please. I think your margin outlook calls for underlying margin trends to soften a bit in the second half. I just wanted to confirm that's the correct reading of the guidance. And I wondered what it assumes about Europe; specifically, how much room for maneuver are you leaving yourselves if competitive conditions were to deteriorate a bit further? And then secondly, there's some important cost-cutting initiatives, obviously, outlined, but in general terms, is it really possible to sort of stabilize controlled EBITDA or controlled free cash flow without really stabilizing the top line? What really is your outlook for the time that it takes between the point at which the short-term chart evolves into the long-term chart and the revenue trend really does stabilize?
Vittorio A. Colao
Should I take the last bit and then you add? You're absolutely right. I mean, the reason why I said there are short-term cost initiatives, which are really going into kind of Robin's direction of being lean and being more efficient, which we have to do, first of all, because now we can do them and second, because there are short-term pressures. But in the long term, the reason why I first talked about pricing and about data and about what we want to do and the questions, the last set of questions about plans and so on, there's no doubt that is the way that our industry and, therefore, also Vodafone will get into a positive cash flow and EBITDA. There's only a certain amount of things that you can do on cost. I don't like the concept of room for maneuver because that's not the way I see things. That's not the way we have managed the company in the last 4 years. Even when we were under pressure, we have always invested what was required to invest. We have not cut CapEx, which is why we didn't end up in bad places from a technology point of view. We are where we need. Like in Germany, we are investing in smartphone penetration and improving. Germany was only 18% smartphone penetration, it's now 28%. It's still lagging. I mean, it's still behind. So we will continue to invest. I don't corner myself with the room to maneuver thing, but I still think that reducing cost is in the short term the right thing to do. Andy, on the softening trends and...
Andrew N. Halford
Yes, I'll try not to use too many double negatives in our reducing rate. Typically, over the last 3 or 4 years, the margin in the second half has been lower than in the first half. Probably last year, it was about 1.5% lower in the second half than the first half. Clearly, our endeavor this year is not to see such a big reduction in the second half and, hence, why we are still targeting the improving rate of margin deterioration overall for the year.
Vittorio A. Colao
Yes, Justin, yes?
Justin Funnell - Crédit Suisse AG, Research Division
I've two or three questions please. Just coming back to the pricing question again, obviously, moving to flat rate voice and SMS, but still with data tiers but more and more emphasis on the need to grow data. In the last few years, you've done a pretty job of controlling data growth and that's kept CapEx to sales down. Is there perhaps a stronger argument now to try and accelerate data growth even at the expense of CapEx perhaps by encouraging more tethering tablets, that sort of thing, and just sort of let it rip a little bit on data? Secondly, I'm just wondering if you have any views on the ongoing discussions in Brussels about consolidation in Austria and whether you see any sign that that's going to go in a direction that encourages you to try and consolidate the industry or, on the other hand, give up? Thirdly, any initial views on what the credit rating impact would be of this IFRS 11 move? It clearly would change debt/EBITDA. One would have thought it shouldn't change it, but you never know. And then finally, the fact that your dividends grown 7.2% not 7.0%, any signs that that's more bullish on dividends for next year or something?
Vittorio A. Colao
I don't know, what's there behind the fraction of the pea [ph] that we can use to hit exactly?
Andrew N. Halford
If we'd done -- if we'd done it to the 0.01, we would have come fractionally below the 7.0%, and we didn't want to be accused of walking away from our 7% commitment.
Vittorio A. Colao
Listen, on Austria, honestly, we don't have any insight because we are not part of that process. We read the same things that you read. We interpret the same statements. We have a sense that there is a little bit of a softening of what seemed initially a pretty hard position. Honestly, any consolidation case we could look at, we have to stand on its own feet and if we are convinced that it is a good chance of being pushed through, we will just pay some lawyers to make our case. I mean it's not a huge amount of read across different situations, different markets, different pricing levels. I wouldn't draw a conclusion from there. On the flat data rates tethering, to be honest, we have not been constraining usage. We have been eliminating abusage or excessive usage in markets where this was the case. But if anything, we are actually trying to encourage usage. And as I said, I'm very pleased that iPhone is going up, tablets are going -- tablets are starting to become the -- we are still behind the U.S. and if I look at the LTE results of Verizon in the U.S., we're much more behind, but this is a good sign because with more content, more applications coming, the data component will be appreciated and used much more with virtual-reality on maps, with all our augmented reality on maps and all the new things. We will all use more and more of these things. So I think we are going in that direction. There's no intention to constrain. There's a contention to actually to take away the psychological barrier. We did a lot of analysis on why the Europeans use less than the Americans, and it turns out that it was basically self-restraint, not the fact that we are pricing in a particularly wrong way. So that is what we are trying to do with the worry-free type of positioning that we are taking.
Justin Funnell - Crédit Suisse AG, Research Division
And credit rating?
Andrew N. Halford
Don't think there'll be an impact there. I mean, they're more influenced by controlled cash flows, et cetera and I think the accounting rules here are slightly secondary to that.
Vittorio A. Colao
Yes. Yes, you've been waiting for a while as well and then we can again, that side.
Paul Marsch - Berenberg Bank, Research Division
It's Paul Marsch from Berenberg. Point 4 on your strategy slide, you say if it's value-creating, you'll acquire assets to enable access to bandwidth. And does that include residential local access bandwidth? And then secondly, on the LTE uplift, you're saying an incremental EUR 10 as a premium ARPU. I guess what we really want to know is how does that compare or how does LTE ARPU compare to what those customers were spending before they migrated onto LTE? And particularly on services, once the handset recovery's stripped out?
Vittorio A. Colao
Yes, maybe the second question, maybe between Paolo and Philipp on the pricing of LTE and the EUR 10 premium, which -- I think there is an interference between the 2 microphones, so you should shut one of the 2 off, or maybe I should from here, I don't know. On -- so the LTE question, I will pass it. The question about convergence or residential access, I mean the logical flow is very simple. If quadruple play, to use a simple equation, if quadruple play becomes the norm, if there is proved willingness of customers to pay for that type of thing, we are going to be there and we are going to be there with our own assets or third-party assets depending on the market. This is very simple, very simple statement. It is what we've done in Italy, when it started many years ago, in Germany, in Portugal, in New Zealand. In New Zealand, we acquired and we are integrating, tests are clear, so we are willing to go there. Now it says, "If value accretive," because some of it is proven to be value accretive, to be honest not the whole of it. So it would depend by market, depending on the value of this market, how much customers are willing to pay, what alternatives we have and so on. But this is to say a scale data company plays basically where the customer's needs are. Paolo, and -- or, Phillipp, do you want to have a comment on LTE pricing and the premium?
Paolo Bertoluzzo
Yes, maybe just a comment on that. I think what we are seeing in the market now is more or less what our strategy is, which is try to place a premium on products which are currently in the market in Europe, which are basically mobile broadband for PC connectivity and tablets. I'll give you an example from Italy, both products are priced EUR 10 higher than their equivalent products on 3G. There is more data allowance on a promotional basis because we will all need to understand what usage is going to be on those type of products, but basically, that's the direction of the market; we see competitors in the same space. Same story would apply, for example, to Portugal where we did launch back some time ago. Obviously -- and the further is an ARPU increase versus the alternative that we currently would have in the market. Clearly, I think the interesting phases will become when we mobilize smartphones, LTE-based smartphones with packages having data included and actually, we see us taking a very consistent approach also on smartphones.
Philipp Humm
Yes, I think for the North and Central European part, we basically pursue the same strategy. So we have 2 products up and running. One is more of a DSL substitution product, which we employ in Germany also at a premium and the other one is our normal LTE included in our advantage plans, which also is at a premium in the market. We're trying with that premium to then make sure we have rental, we have products which are really worthwhile over time.
Vittorio A. Colao
Shall we go back there? Yes.
Emmet Kelly - BofA Merrill Lynch, Research Division
Emmet Kelly from Merrill Lynch. Just one question, please, just coming back to the situation in Austria. It seems that the European Commission is still playing a bit of hard ball on in-market wireless consolidation, which is surprising because Austria is such a small market in terms of population. However, it does seem that they are willing to accept network sharing and deeper forms of network sharing. I know last year you signed a deeper agreement with Telefónica O2 here in the U.K. Can you just say how much scope there is to go deeper in terms of network sharing in the other countries in Europe, thinking in particular in Germany, Italy and Spain? I know the Commission has made noise about you being able to share spectrum as well in the future and how network sharing could fit in with your best network rollout in Europe as well.
Vittorio A. Colao
Yes, it's not an answer that we can give in a blanket type of way. We need to go market-by-market. It's not an answer that can be given regardless of the departing condition, the EBITDA levels and who would that be the other party. So I think we need a lot of passive-sharing deals, which actually now amount, what, 50%, 60%?
Andrew N. Halford
For the whole group, 66% [ph].
Vittorio A. Colao
For the whole group, 60%. If you take out India, it's probably 50% in Europe or?
Andrew N. Halford
Vittorio A. Colao
46%, okay so it's more or less 50%. In Europe, that is fine. We did the deal in the U.K. for specific reasons linked to spectrum and linked to the profitability of the market and also, to be honest, the geography, the concentration in London. And by the way, in London we have not shared, so again, you how to qualify exactly what we are talking about. If you take a train up to Scotland, probably, doesn't make a huge difference whether you are fully alone or with somebody else, but, for example, in London, we want to -- we are very keen to keep our own control over what we do. In the other markets, honestly, it depends and clearly, there are discussions going on.
Akhil Dattani - JP Morgan Chase & Co, Research Division
Akhil from JPMorgan. Just two questions, please. Firstly, on Germany and U.K. where we've seen a bit of a revenue slowdown this quarter, just wonder if you could comment on whether you feel that's a sign that the markets are worsening a bit in terms of competition or whether you just think your historical outperformance is unwinding, and whether we should expect that to continue over the next couple of quarters? And then, secondly, on the issue of restructuring charges. Given that you're guiding to a GBP 300 million cost reduction into next year, presumably, we should expect further restructuring charges. And, as such, if that's true, should -- would you be able to give us some sense of what the numbers might be into H2 and maybe into next year as well?
Vittorio A. Colao
Can I pass the first question to Philipp, since we have been commenting this morning competitive performance in detail that will last?
Philipp Humm
So if we look at the 2 market, the first one, the U.K., we are, overall, from a market share point of view, pleased with our position as we are holding our market share, service revenue market share year-over-year in a very competitive market and the U.K. is very price competitive, as you all know. So I think, overall, we are doing okay, with minus 3.2% service revenue decline. Net of MTR and roaming, we are in the positives again. We launched in the U.K. specifically the advantage plans where we will obviously only see the benefits coming out over the coming quarters to strengthen the ARPU base and we also went in the postpaid area into a price increase, another way to strengthen our ARPU base going forward. If you look at the German market, on the other hand, in Germany, we still are ARPU accretive. So we're still growing our ARPUs by 5% year-over-year, and we basically use the concept of our Red plans also in other areas, for example, in the prepaid space and also now in the inflow starting to be ARPU accretive in prepaid as well. So we're very much focusing on the higher value parts of the market in prepaid and in postpaid, with the respective price plans to drive our service revenue up. This has, here and there, some negatives on the volume, but that's a negative we are very much willing to take as it really drives our revenue up. And we are leading -- continuing to lead the market from a revenue point of view.
Vittorio A. Colao
I think we have time for a couple more questions. There? Anybody down there? No. Okay, so maybe yes, there. Yes, sure, sure.
James Ratzer - New Street Research LLP
James Ratzer from New Street Research. I had two questions, please. The first one was just regarding your EBITDA margin guidance; so looking for the second half to be a lower decline than in the first half. I was wondering if you could let us know specifically, which geographic markets we're going to see that improving trend. And if costs next year-on-year are going to start coming down in absolute terms, can we start thinking that year '13, '14 will actually start to see margins grow for Vodafone Group? And then the second question was just regarding the assumptions you made for your impairment tests. It looks like in Italy and Spain, your 5-year budgeting assumes CapEx to sales remain stable. Is that consistent with your thinking across the group that over a 5-year view, CapEx to sales should be stable?
Andrew N. Halford
Okay, shall I -- let me pick that up. So as I think I said earlier, in terms of the second half EBITDA, the things which will help us there, one will be the strong performance we've got in India and Vodacom flowing through further into the year, and the second those markets becoming a bigger proportion of the group will help as well. Thirdly, the things we are doing on the operating costs are taking costs out. And finally, the new pricing model, hopefully, will take some of the acquisition subsidy out. So it's a combination of those that give us the confidence that we can still get the rate of margin erosion down year-on-year. After next year, to be honest, I'd rather not sit here with a crystal ball. It would be nice to think we could get to a point when margins were going to pick up, but it is so dependent upon the top line and I think I'd rather handle that one nearer the time rather than forecast and speculate far ahead. On impairment, we have, as you say, got a fairly stable level of capital intensity assumed for the 2 markets that we have impaired. Obviously, that is flexed according to the sort of top line prospect by doing it as a proportion of the revenues. But overall, our view is that the direction of travel on the CapEx should remain fairly similar to that that we've seen recently.
Vittorio A. Colao
We have time for probably one more.
John Davies - Grupo Santander, Research Division
It's John Davies from Santander. I have 2 questions, sorry. So first one is on data bundling. You said you want to give customers big bundles if they had the confidence to use all the services. Does that mean you've sort of moved away from the idea of potentially reverse billing content providers so they could 0 rate the traffic? And secondly, a couple of your competitors, over the last few weeks, have referred to the actions of some of your companies in terms of their tariffing as being irrational. Now, I'm sure you'll dispute that, but can you think of anything which your companies might have been doing which would make them think that? Is it that you're further down the track towards this flat-rate voice or whatever it maybe?
Vittorio A. Colao
Yes, John, thank you for your questions. First of all, reverse billing or charging for contents-on, Vodafone has, quite frankly, never been really supportive of it as a mandated thing. So if somebody wants to come to us, but honestly I don't have people lining up out of my door and say, "I have this beautiful account and I really would like to push it to 500,000, 1 million, 10 million customers, it's a new movie, whatever. Can I get it 0 rated in exchange for something?" Yes, they tend to do it for free. So they request, "Can I push this for free?" Now, for free, I'm afraid we are not in that business. But we are not in the opposite business, which is I'm going to charge Google, I'm going to charge these people because we don't think that it's a -- it's neither a healthy nor a very likely model to succeed. And that's more of a, I think, fixed line point than us. On the irrational -- sorry, you had a point on the -- on data bundling? In general, we are doing it because we see a potential to really liberate usage and we see a great potential to really increase penetration at the lower level. If you think about it, the problem is never to convince the high end of the market to take the iPhone and spend the 40. It's to convince those who spend 10 or 12 to go to 20 or 25, but those who spend 10 or 12 are many more than the other ones. So it's a little bit about really becoming a generalized data company. It's a vision that we share with our colleagues in the U.S. In the U.S., it's much more visible. Penetration is much higher. The ARPUs are much higher, so that's the type of vision that is driving this. Now, on the irrational point, this is an interesting point, because I don't know what you're referring to, so it's difficult to say. If they're referring to Red, which I know because I saw some kind of strange faces, you referred to the fact that we moved to that, yes, that is a big pricing change. That is a radical pricing change. Now, of course, if you have a big legacy revenue and you are very fearful that your highly priced mature voice will collapse, but, of course, they would call it irrational, but it depends on what irrationality you're talking about. We are thinking about the company 5 years from now, 10 years from now, not for the next 2 quarters. In that sense, if that's what they referred to, I think it's -- I believe that when you see the number of people who use WhatsApp, the number of people who use Skype, it's actually incredibly rational what we are doing. And I'm convinced it is incredibly rational. Now if you're talking about the individual promotion, the little thing that happens in one market and all of that, I mean can I exclude that in some market? I read Italian newspapers every day. I read British newspapers every day. I read not every day but often Spanish newspaper. I don't read German newspapers. We have somebody who can. Honestly, I really honestly don't see Vodafone being relative to our main competitors being really silly or irrational or doing a crazy thing. In the U.K., we have -- I think we are GBP 1 more expensive than Everything Everywhere on the iPhone free from. Now, they are the market leader. In theory, they should be setting the price. We are at GBP 47, they are at GBP 46. Do I call it irrational? I say "No, fine." I mean, they can have their own policy. So, I don't think that tactically, we are irrational. I think that we made a big strategic move which -- with courage, yes.
I think we are done. I thank you very much for your questions. Again, some positives, some headwinds, good strategy to mitigate the headwinds and long-term vision about the company. I look forward to seeing you in the one-on-ones and in the various meetings between now and May. Thank you.
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