Executive Summary / Key Takeaways

• Vodafone Group has undergone a profound strategic transformation, divesting non-core assets like Spain and Italy and pursuing the merger of Vodafone and Three UK, to establish a more focused and scaled portfolio poised for sustainable adjusted free cash flow growth.
• The company's commitment to enhancing customer experience, coupled with significant investments in network quality and differentiated technologies such as its IoT platform and M-Pesa financial services, underpins its competitive positioning and long-term value creation.
• Despite ongoing competitive pressures and a challenging turnaround in Germany, Vodafone delivered on its FY25 financial guidance, projecting an acceleration in group adjusted free cash flow to €2.6 billion - €2.8 billion for FY26, representing a 17% per share growth.
• Strategic initiatives in B2B digital services and robust performance in emerging markets like Turkey and Africa are key growth engines, contributing two-thirds of the group's adjusted free cash flow and diversifying revenue streams.
• While the UK merger with Three UK presents initial integration costs, it is expected to generate substantial synergies and drive free cash flow accretion by the fourth year, further solidifying Vodafone's market leadership and growth trajectory.

Vodafone's Strategic Evolution: A Reshaped Powerhouse

Vodafone Group Public Limited Company (NASDAQ:VOD), a leading European and African telecommunications provider, is in the midst of a profound strategic evolution. Incorporated in 1984, the company has historically focused on connecting over 355 million mobile and broadband customers across 15 countries, with significant investments and partnerships globally. Its foundational strengths include operating one of the world's largest IoT platforms, managing over 215 million connections, and providing financial services to approximately 92 million customers across seven African nations, handling more transactions than any other provider. Vodafone's undersea cables also play a critical role, transporting around a sixth of the world's internet traffic.

Under the leadership of Margherita Della Valle, a comprehensive transformation agenda was initiated approximately two years ago, centered on customers, simplicity, and growth. This strategic overhaul has involved a significant reshaping of the group's structure, operational simplification, and a relentless focus on improving customer experience. A cornerstone of this strategy has been the rightsizing of its portfolio through key divestitures, including the successful sale of its Spanish operations in May 2025 and Vodafone Italy in late December 2024, which generated €8 billion in cash. These proceeds have been instrumental in reducing net debt and funding shareholder returns. Concurrently, the impending merger of Vodafone and Three UK, which received CMA approval by Q3 2025, is set to create a combined entity uniquely positioned for growth and market leadership.

The broader telecommunications industry is experiencing dynamic shifts, driven by increasing demand for high-speed connectivity, digital services, and the transformative potential of emerging technologies like 5G, IoT, and AI. Vodafone's strategy is designed to capitalize on these trends, moving beyond traditional connectivity to offer integrated solutions that address evolving customer needs. The company's purpose, "to keep everyone connected," guides its investments in next-generation infrastructure and services, aiming to secure a sustainable competitive advantage in a rapidly changing landscape.

Technological Edge: Connecting from Seabed to Stars

Vodafone's competitive differentiation is increasingly rooted in its technological capabilities and innovative service offerings. Beyond its extensive mobile and fixed networks, the company leverages several core technologies to enhance its market position and drive growth. Its global network of undersea cables, for instance, is a critical piece of internet infrastructure, handling a substantial portion of global internet traffic. This foundational asset provides a robust backbone for its connectivity services worldwide.

The company's IoT platform stands out as one of the world's largest, connecting over 215 million devices. This scale provides Vodafone with significant data insights and operational efficiencies, enabling it to offer advanced solutions to enterprise customers across diverse sectors such as health, banking, transport, and agriculture. In Africa, Vodafone's M-Pesa mobile money platform is a powerful differentiator, serving approximately 92 million customers and managing more transactions than any other provider in the region. This proprietary technology not only generates significant revenue but also fosters deep customer loyalty and expands Vodafone's reach into the burgeoning financial services sector in emerging markets.

Vodafone is actively investing in future-proof technologies and R&D initiatives. The company is developing a new direct-to-mobile satellite communications service, aiming to connect areas without traditional network coverage, thereby expanding its addressable market. In its German operations, the fixed network has been independently rated as the "best-fixed network in Germany," delivering gigabit-capable broadband to 75% of German households and resulting in a third fewer network complaints. This focus on quality directly translates into improved customer satisfaction and reduced churn.

Furthermore, Vodafone is exploring cutting-edge technologies through strategic partnerships. A collaboration with Cyient has unveiled an AI-powered Network Configuration Management Solution, designed to deliver "unprecedented visibility and efficiency across Vodafone's teams and markets." Separately, a partnership with ORCA Computing is exploring the use of quantum technology to identify the "fastest and most cost-effective routes for upgrading and extending fixed and mobile broadband connections." The stated goal of this quantum initiative is to handle more complex processing tasks than traditional computers in network planning and optimization. These technological advancements are crucial for investors, as they contribute to Vodafone's competitive moat, drive operational efficiencies, enhance customer experience, and position the company for long-term growth in an increasingly digital world.

Competitive Arena: Strengths, Challenges, and Strategic Positioning

Vodafone operates in a fiercely competitive global telecommunications market, facing both established incumbents and agile new entrants. The company's competitive standing is defined by its extensive global footprint, diversified service offerings, and a renewed focus on customer satisfaction. Vodafone holds a prominent position as a leading European and African telecoms company, a qualitative advantage that provides diversified revenue streams compared to more regionally concentrated rivals like Verizon Communications (VZ) and AT&T (T), which are primarily U.S.-centric.

In Europe, Vodafone directly competes with giants such as Deutsche Telekom (DTE) and Orange S.A. (ORAN). While Deutsche Telekom often exhibits strong technological prowess and regulatory expertise, Vodafone differentiates itself through its global partnerships and integrated services, particularly its IoT and M-Pesa platforms. These offerings provide a unique value proposition that extends beyond core connectivity, addressing gaps in global payment systems and specialized enterprise solutions. Vodafone's B2B segment, which is approaching 30% of group service revenue, acts as a challenger to incumbents, leveraging its less exposed position to legacy products to help corporates drive efficiencies through digital services.

Customer experience has become a critical battleground. Vodafone has made significant strides, achieving "best evers" in customer experience in both the UK and Germany. In the UK, it has become the NPS leader across mobile and fixed, driving record-low customer churn. In Germany, the company has "halved the gap to the incumbent" in NPS, a testament to its structural reset and investment in customer satisfaction. This focus on customer loyalty is a strategic response to competitive intensity, aiming to reduce churn and improve commercial performance.

However, Vodafone faces notable competitive challenges. The German mobile market, for instance, has seen "heightened competition" and "aggressive price points," leading to expected ARPU pressure. While Vodafone aims to remain disciplined in its pricing, the promotional activities by competitors, including Deutsche Telekom, create a challenging environment. Similarly, the UK market, despite Vodafone's NPS leadership, has been noted for its networks lagging behind other developed markets, necessitating significant investment. The impending merger with Three UK, while transformative, involves substantial front-loaded investments and integration risks. Vodafone's competitive disadvantages include a historical perception of slower innovation speed in certain areas compared to rivals like Verizon, and its debt levels, though improving, require careful management. The company's strategic adaptability, particularly in emerging markets, and its commitment to network quality and technological innovation are crucial for maintaining and expanding its market share against formidable competitors.

Financial Transformation: Building a Foundation for Growth

Vodafone's financial performance in FY25 was in line with expectations, reflecting the initial benefits of its strategic transformation. The group successfully delivered on its guidance for both EBITDAaL and adjusted free cash flow. This achievement is particularly noteworthy given the significant portfolio reshaping and ongoing operational challenges, especially in Germany.

For FY25, the company reported an annual revenue of €37.45 billion and an annual operating cash flow of €15.37 billion. Despite a net loss of €4.17 billion, largely influenced by non-operating items and restructuring, the focus remains on underlying operational performance and cash flow generation. The group's EBITDAaL grew by 5.1% in Q1 FY25, demonstrating good operational leverage driven by lower inflation.

Segment-specific performance highlights the strategic shift:

• Germany: Service revenue declined in Q1 FY25, with fixed broadband down 2% due to the MDU TV law change and mobile down 0.8% due to business performance. Q2 FY25 saw the peak impact of the MDU transition, contributing a 3.8% year-over-year headwind to service revenue. The second half of FY25 is expected to see lower EBITDAaL compared to the first half due to the full run rate of the MDU transition and heightened mobile competition. However, the broadband base has stabilized, and the 1&1 migration is ramping up, expected to reach full run rate by H2 FY26.
• United Kingdom: Service revenue was stable in Q1 FY25 and improved to +1.2% in Q2 FY25. EBITDA grew over 8% in the first half of FY25, driven by strong commercial momentum and cost benefits. The UK business is expected to represent one-fourth of the group's service revenue post-merger.
• Africa and Turkey: These emerging markets demonstrated strong service revenue growth in Q1 FY25. Turkey, in particular, delivered over 50% growth in euro terms in Q3 FY25, with its FY25 EBITDA expected to be €300 million higher in euro terms than pre-devaluation. This growth is attributed to disciplined execution, growing revenue ahead of inflation, and strong market potential.
• Other Europe: Service revenue grew by 2.3% in Q1 FY25, with B2B growing by 3.3%. EBITDA grew over 3% in H1 FY25, indicating solid and predictable performance.
• B2B Digital Services: This segment exited Q4 FY25 with 5.1% growth, with digital services growing particularly strong at 18% in Q2 FY25. While structural margins are slightly lower than core connectivity, its "very low" capital intensity makes it highly attractive from a returns and cash flow perspective.

Vodafone has significantly strengthened its balance sheet, reducing net debt to €33.24 billion by FY25. The company is "substantially deleveraged" and holds €16 billion of liquidity, providing considerable financial flexibility. Capital allocation has prioritized shareholder returns, with €2 billion returned through buybacks and €1.8 billion in dividends over the last year, and a new €2 billion buyback program commencing. These actions underscore management's confidence in the company's financial health and its ability to generate sustainable cash flows.

Outlook and Guidance: A Clear Path to Accelerated Free Cash Flow

Vodafone's forward-looking guidance signals a clear trajectory towards accelerated growth, particularly in adjusted free cash flow. For FY26, on a pre-UK merger basis, the company anticipates "continued underlying growth" for both adjusted EBITDAaL and adjusted free cash flow. Group adjusted EBITDAaL is projected to be between €11 billion and €11.3 billion, with Europe contributing between €7.2 billion and €7.4 billion. Crucially, group adjusted free cash flow growth is expected to accelerate to a range between €2.6 billion and €2.8 billion. This translates to a robust 17% year-on-year growth in adjusted free cash flow per share for FY26, highlighting the accretive nature of the company's strategic initiatives.

The UK merger with Three is a pivotal component of this outlook. While the pro forma FY26 impact is expected to include an initial €200 million adjusted free cash flow drag due to front-loaded investments in network build-out, integration, and interest payments, the long-term benefits are substantial. The merger is anticipated to achieve a full run rate of GBP 700 million in annual cost and CapEx synergies by the fifth year, with free cash flow accretion expected by the fourth year. This transformative deal positions Vodafone for leadership in mobile and as a leading challenger in fixed broadband in the UK.

In Germany, the turnaround remains a priority. Management expects a "significant improvement of EBITDA" through FY26. This recovery will be driven by the cessation of the year-over-year MDU drag from Q2 FY26 and the ramp-up of the 1&1 customer migration, which is projected to reach its full run rate by the second half of FY26. While mobile market conditions are expected to remain challenging, the company's guidance assumes the current pricing environment persists. Vodafone's continuous investment in customer experience, brand, and B2B capabilities in Germany is designed to stabilize the customer base and foster long-term growth.

Vodafone Investments, encompassing assets like Vantage Towers, is expected to continue providing stable dividend flows, with approximately €300 million annually from Vantage Towers, supported by its strong performance. The company's capital allocation strategy, including ongoing share buybacks and an ambition to grow the rebased dividend, reinforces its commitment to shareholder value. Management has indicated that while detailed multi-year guidance will be provided post-UK integration, the current actions are setting the stage for a "new growth trajectory for the years ahead."

Risks and Opportunities: Shaping the Future Landscape

While Vodafone's strategic transformation presents a compelling investment thesis, several risks and opportunities warrant close attention. The German market, despite ongoing turnaround efforts, remains a significant challenge. Heightened competition in mobile, characterized by "aggressive price points" and promotional activities from rivals, is expected to continue exerting ARPU pressure. The underlying structural decline in TV services also presents a persistent drag. Furthermore, delays in the 1&1 migration or a significant B2B project could impact revenue recognition and financial performance in FY26. The risk of a non-cash impairment in Germany's segment value, while not affecting cash flow, remains a possibility given the lower-than-expected H2 FY25 performance.

The UK merger with Three, while strategically vital, carries execution risks. The initial "free cash flow drag" from front-loaded investments and integration costs will require careful management to ensure the projected GBP 700 million in synergies and free cash flow accretion by the fourth year are realized. Globally, the telecommunications sector is subject to regulatory changes, which can impact pricing, market structure, and investment requirements. Vodafone's exposure to diverse international markets also introduces currency fluctuation risks and geopolitical uncertainties, as evidenced by the "premature" nature of discussing value creation in India.

However, significant opportunities exist. The company's focus on B2B digital services and IoT, characterized by high growth rates and low capital intensity, offers a powerful avenue for expansion. The "geopolitical-induced focus on sovereign technology services on defense areas" further supports demand for these offerings. Emerging markets in Africa and Turkey are proving to be robust growth engines, with "nonlinear growth opportunities" in financial services and data centers, driven by favorable demographics and regulatory environments. Vodafone's strong balance sheet and substantial liquidity provide a buffer against unforeseen challenges and enable continued investment in strategic growth areas. The company's commitment to improving customer experience and network quality across its markets is a fundamental opportunity to enhance loyalty, reduce churn, and drive sustainable revenue growth.

Conclusion

Vodafone Group is undergoing a profound and necessary transformation, strategically reshaping its portfolio and operations to unlock sustainable adjusted free cash flow growth. By divesting non-core assets and pursuing the transformative UK merger, the company is establishing a more focused footprint with strong local scale. This strategic pivot, combined with relentless execution on customer experience, significant investments in next-generation technologies like IoT and M-Pesa, and a disciplined approach to capital allocation, underpins a compelling investment narrative.

While challenges persist, particularly in the competitive German market and during the initial integration phases of the UK merger, Vodafone's clear guidance for accelerated free cash flow growth in FY26 and its long-term ambition for sustainable per-share growth highlight a company on a new trajectory. The strength of its B2B digital services and the robust performance of its emerging markets provide crucial diversification and growth engines. Investors should recognize Vodafone's commitment to operational excellence and technological leadership as key drivers for future value creation, positioning the company to capitalize on evolving industry trends and deliver enhanced returns.