BT 2006 Annual Report Download - page 36

impact of the £358 million profit on disposal of non current
asset investments in 2005.
OPERATING COSTS
Total operating costs before specific items increased by 7% in
the 2006 financial year to £17,108 million; excluding the
impact of acquisitions the increase was 3%. Our cost efficiency
programmes achieved savings of over £400 million in the 2006
financial year which enabled us to continue investing in growing
our new wave activities.
As a percentage of revenue, operating costs, excluding
specific items, were 88% in the 2006 financial year (2005 –
86%). In both financial years, net specific items were incurred,
amounting to £138 million and £59 million in the 2006 and
2005 financial years, respectively. These specific costs are
considered separately in the discussion which follows.
2006 2005
£m £m
Operating costs:
Staff costs 4,966 4,554
Depreciation 2,635 2,694
Amortisation 249 150
Payments to telecommunications
operators 4,045 3,725
Other operating costs 6,113 5,528
Own work capitalised (900) (722)
Total operating costs before specific
items 17,108 15,929
Specific items 138 59
Total operating costs 17,246 15,988
In the 2006 financial year, the number of staff employed
increased by 2,300 to 104,400, mainly due to the additional
staff required to service networked IT contracts and the
increased levels of network activity.
Early leaver costs of £133 million were incurred in the 2006
financial year, compared with £166 million in the 2005 financial
year. This reflects BT’s continued focus on improving
operational efficiencies. The group’s pension expense for 2006
was £603 million, an increase of £63 million from the 2005
financial year.
The increase in headcount, pay rates and pension costs,
partially offset by lower leaver costs have contributed to a 9%
increase in staff costs which were £4,966 million in the 2006
financial year. The increase in pension costs includes a switch
between wages and salaries and pension costs as a result of the
introduction of Smart Pensions, a salary sacrifice scheme, as
well as the increased headcount and pay rates.
The depreciation charge decreased by 2% in the 2006
financial year to £2,635 million. The amortisation charge
increased by £99 million to £249 million in the 2006 financial
year due to higher capitalised software development costs and
the intangible assets associated with the acquisitions in 2005.
Payments to other telecommunications operators increased
by 9% in the 2006 financial year to £4,045 million. The
increase mainly reflects the full year impact of the Albacom and
Infonet acquisitions and higher volumes.
Other operating costs before specific items increased by
11% in the 2006 financial year to £6,113 million. This reflects
not only the cost of supporting new networked IT services
contracts, but also increased levels of activity in the network.
Other operating costs include the maintenance and support of
our networks, accommodation, sales and marketing costs,
research and development and general overheads.
SPECIFIC ITEMS
The specific items for the 2006 and 2005 financial years are
shown in the table below.
2006 2005
£m £m
Operating costs:
Property rationalisation costs 68 59
Creation of Openreach 70 –
138 59
Other operating income:
Profit on sale of non current asset
investments –(358)
Associates and joint ventures:
Profit on sale of joint venture (1) –
Impairment of assets in joint ventures –25
Total specific items 137 (274)
In the 2006 financial year, specific operating costs included
£68 million of property rationalisation charges in relation to the
group’s provincial office portfolio (2005: £59 million). This
rationalisation programme is expected to continue through next
year giving rise to further rationalisation costs. In addition a
provision of £70 million was recognised relating to the
incremental and directly attributable costs to create the new
line of business, Openreach, arising from the Undertakings
agreed with Ofcom.
In the 2005 financial year, the profit from disposal of non
current asset investments, included within other operating
income, totalled £358 million. This mainly comprised the sale of
BT’s 4% interest in Intelsat for net proceeds of £64 million
which resulted in a profit on disposal of £46 million, the sale of
BT’s 15.8% interest in Eutelsat SA for net proceeds of
£356 million resulting in a profit on disposal of £236 million
and the sale of BT’s 11.9% shareholding in StarHub Pte Ltd for
net proceeds of £77 million which resulted in a profiton
disposal of £38 million.
In the 2005 financial year BT incurred an impairment charge
of £25 million, being BT’s share of a write down of Albacom’s
assets prior to Albacom becoming a subsidiary.
OPERATING PROFIT
In the 2006 financial year, operating profit before specific items
described above was 2% lower than the 2005 financial year at
£2,633 million. This reflects the increased operating costs,
described above, in the 2006 financial year more than
offsetting the revenue growth.
Total operating profit for the 2006 financial year was
£2,495 million compared to a profit of £2,992 million in the
2005 financial year.
BT Group plc Annual Report and Form 20-F 2006 Operating and financial review34