VODAFONE GROUP PUBLIC LTD CO annual report, Q4 FY2018

Business context and reporting period

Vodafone Group Plc’s Form 20-F is an annual report for the fiscal year ended March 31, 2018, prepared under IFRS. It covers a multinational mobile and fixed telecommunications operator, reporting principally across Europe and Africa, Middle East and Asia-Pacific (AMAP). Vodafone India is presented as a discontinued operation following the agreed combination with Idea Cellular; the transaction had not closed by year-end.

Financial performance and position

Organic service revenue grew 1.6%; organic adjusted EBITDA grew 11.8%, or 7.9% excluding regulation, UK handset financing and settlements. The reported adjusted EBITDA margin rose 1.9 percentage points; underlying organic margin improvement excluding those impacts was 1.3 points. Management’s alternative performance measures are non-GAAP and should be considered alongside the reported IFRS figures.

Material changes versus the prior period

• Revenue fell 2.2% and service revenue fell 4.5% as reported, reflecting foreign exchange movements and the deconsolidation of Vodafone Netherlands after formation of VodafoneZiggo. On an organic basis, service revenue increased.
• Operating profit and adjusted EBITDA improved, with cost efficiencies and stronger performance in Europe and AMAP supporting margin expansion.
• Reported profit shifted from a €6.1bn loss to €2.8bn profit. The comparison is affected by the prior-year €4.5bn India impairment and €1.3bn gain on forming VodafoneZiggo. FY2018 includes a €3.2bn non-cash remeasurement loss on Vodafone India, reported in discontinued operations.
• Net debt increased by €0.3bn. Free cash flow after spectrum and restructuring rose to €4.0bn and covered the €3.9bn equity dividend paid during the year.

Outlook, management commentary and risks

Management described FY2018 as a year of strategic progress and strong financial performance, citing mobile-data growth, fixed broadband additions, convergence and cost control. For FY2019, Vodafone expected organic adjusted EBITDA growth of 1%–5% and free cash flow before spectrum of at least €5.2bn. It expected higher spectrum costs as European 5G auctions approached. Management also cautioned that IFRS 15, adopted from April 1, 2018, was expected to reduce reported revenue by approximately 2%–3% and service revenue’s share of total revenue by 2.5–4.5 percentage points, without an expected cash-flow impact.

On May 9, 2018, after year-end, Vodafone agreed to acquire Liberty Global operations in Germany, the Czech Republic, Hungary and Romania for enterprise value of €18.4bn, subject to regulatory approval and expected to close around mid-2019. The announced funding included new debt facilities, hybrid securities and mandatory convertible bonds; the agreement carries a €250m break fee in specified circumstances. Vodafone also announced a €9.8bn bond issue in May to support the transaction. The acquisition materially affects future leverage and capital allocation.

The India–Idea merger was expected to complete in June 2018, subject to outstanding approvals. Vodafone expected to inject up to €1bn of incremental equity into India, net of specified proceeds. Other notable risks include intense mobile price competition, regulation and spectrum costs, execution of digital and IT transformation, cybersecurity and data protection, and economic and foreign-exchange volatility. Vodafone disclosed substantial Indian tax disputes, including retrospective tax demands for which it has not recorded a provision; other Indian tax claims exceed €2.4bn plus interest and potential penalties. The Group held €521m of provisions for potential tax liabilities across jurisdictions. UK pension arrangements also have substantial guarantees and security commitments.

Most important facts for investors to verify

• Reconcile reported profit and cash flow to the discontinued India business, the €3.2bn India remeasurement, and Vodafone’s non-GAAP adjusted measures.
• Check the final terms, approvals, financing and expected closing of the €18.4bn Liberty Global acquisition, and the resulting debt and leverage.
• Track completion terms and final ownership and funding requirements for the Vodafone India–Idea merger, including the value of Vodafone’s retained stake.
• Assess the status and potential financial exposure of Indian tax and regulatory proceedings, including claims not provided for in the accounts.
• Compare FY2019 performance and dividend coverage with management’s EBITDA and pre-spectrum free-cash-flow outlook, accounting for IFRS 15 and spectrum spending.
• Review liquidity, debt maturities, refinancing needs and contingent obligations, including pension guarantees and acquisition commitments.