BT 2006 Annual Report Download - page 33

LINE OF BUSINESS RESULTS
In the following commentary, we discuss the operating results
of the group for the 2006 and 2005 financial years in relation to
the lines of business.
There is extensive trading between the lines of business and
their profitability is dependent on the transfer price levels. For
regulated products and services those transfer prices are based
on market prices, whilst for other products and services the
transfer prices are agreed between the relevant lines of
business.
The table below analyses the trading relationships between
each of the lines of business for the 2006 financial year. The
majority of the internal trading is BT Wholesale selling calls,
access lines, broadband connections and other network
products to BT Retail. This trading relationship also reflects the
pass through of termination charges on other telecom operator
networks and the sale of wholesale broadband ISP products. BT
Retail also trades with BT Wholesale, selling apparatus,
operator assistance and directory enquiries services and
conferencing for onward sale to other telecom operators. BT
Global Services’ revenue with BT Retail mainly reflects the sales
of BT Global Services’ products in the UK. BT Global Services
trades with BT Wholesale mainly for use of the IP/ATM network,
International Direct Dial traffic settlements and certain dial IP
revenue share arrangements. BT Wholesale’s revenue with BT
Global Services reflects the use of the network infrastructure for
BT Global Services’ products.
Internal cost recorded by:
BT
Retail
£m
BT
Wholesale
£m
BT Global
Services
£m
Other
£m
Total
£m
Internal revenue recorded by:
BT Retail – 183 140 10 333
BT Wholesale 4,494 – 512 – 5,006
BT Global Services 551 885 – 45 1,481
Total 5,045 1,068 652 55 6,820
The line of business results are presented and discussed before
specific items, for the reasons set out above, to provide a
meaningful comparison of the trading results between the
financial years under review. Specific items are discussed
separately in a group context in this Financial review.
In addition to measuring financial performance of the lines of
business based on the operating profit before specific items,
management also measure the operating financial performance
of the lines of business based upon the EBITDA before specific
items. EBITDA is defined as the group profit (loss) before
depreciation, amortisation, interest and taxation. This is a
non-GAAP measure and therefore may not be directly
comparable to the EBITDA of other companies as they may
define it differently. EBITDA excludes interest, taxation,
depreciation and amortisation, the latter two being non cash
items, from group operating profit and is a common measure,
particularly in the telecommunications sector, used by investors
and analysts in evaluating the operating financial performance
of companies.
EBITDA before specific items is considered to be a good
measure of the group’s operating performance because it
reflects the underlying operating cash costs, by eliminating
depreciation and amortisation, and excludes material one off or
unusual items that are predominantly related to corporate
transactions. EBITDA is not a direct measure of the group’s
liquidity, which is shown by the group’s cash flow statement
and needs to be considered in the context of the group’s
financial commitments. A reconciliation of EBITDA before
specific items to group operating profit (loss) by line of business
and for the group is provided in the table across the page
above. Trends in EBITDA before specific items are discussed for
each line of business in the following commentary.
BT Retail 2006
£m
2005
£m
Revenue 8,452 8,698
Gross margin 2,354 2,354
Sales, general and
administration costs 1,563 1,600
EBITDA 791 754
Operating profit 644 607
Capital expenditure 153 170
BT Retail’s results demonstrated a continued strategic shift
towards new wave products with growth in broadband,
networked IT services and mobility revenues. Despite the
substitution by new wave products, traditional revenue was
defended by changes in pricing structure and packages to
benefit frequent users and marketing campaigns focusing on
key customer service promises. BT Privacy, a service to address
the problem of unwanted calls by giving customers greater
control over the calls they receive, was launched on 1 July
2005, with 3.7 million customers registered by 31 March 2006.
As at 31 March 2006, 16.2 million customers were on BT
Together packages. In the small and medium size (SME) UK
business market the focus remains on placing customers on
commitment packages whereby lower call prices are received
for annual committed spend. By 31 March 2006 there were
513,000 Business Plan sites, up 15% in the year. Cost
transformation programmes continued to successfully reduce
the cost base of the traditional business, allowing investment in
new wave products and services.
BT Retail’s revenue decreased by 3% in the 2006 financial
year to £8,452 million. The growth in new wave revenue of
38% in the 2006 financial year continued to reduce our
dependence on traditional revenue, the decline in which was
driven by the impact of regulation and competition. After
Operating and financial review BT Group plc Annual Report and Form 20-F 2006 31
Operating profit (loss)
before specific items Depreciation
Amortisation of
intangible assets
EBITDA before
specific items
2006 2005 2006 2005 2006 2005 2006 2005
£m £m £m £m £m £m £m £m
644 607 120 133 27 14 791 754 BT Retail
1,992 1,950 1,778 1,831 124 83 3,894 3,864 BT Wholesale
363 411 556 513 82 37 1,001 961 BT Global Services
(366) (275) 181 217 16 16 (169) (42) Other
–––––––– Intra-group
2,633 2,693 2,635 2,694 249 150 5,517 5,537 Group totals