Carphone Warehouse 2006 Annual Report Download - page 18

Telecoms Services Division continued
market, Onetel and Tele2 UK, in December 2005,
bringing an additional 1.3m residential customers into
the Group. We have made significant progress on the
integration of these businesses into TalkTalk, a process
that will be completed later this year when we finish
migrating Onetel’s traffic and customers onto our own
network and billing platform. A reorganisation provision
of £22.3m has been made for the cash costs arising
from the integration of the Onetel business.
The market pricing structure for the provision of line
rental to customers was finally addressed during the
year, allowing us to start billing customers for their line
as well as their calls. Previously, the wholesale price
available from BT had been higher than BT’s own
retail price. Following this change we now have
722,000 customers on a unified bill for calls and line
rental, equating to 28% of the total UK base. Our
target is to increase this to 60% of the voice base in
the coming year, because although line rental is still a
zero margin product, it does increase customer tenure.
During the year we finalised our strategic review
of the options for providing broadband to residential
customers. As a result of the clear regulatory
framework established by Ofcom and the undertakings
made by BT, in conjunction with our own review of the
market, we announced in November 2005 our plans to
invest in local loop unbundling. Our initial goal was to
install our equipment within 1,000 BT exchanges over
the next three years at a cost of approximately £50m.
Subsequent to the year end, we have launched our
commercial proposition for broadband in the UK: the
provision of free broadband, forever, for customers
taking our line rental and inclusive calls package. To
support this aggressive strategy, we have accelerated
our investment programme, and now aim to have
1,000 exchanges unbundled by May 2007, giving
us nearly 70% coverage of the population.
Our longer term goal is a base of 3.5m residential
customers by March 2009, of which at least half will
be on our new bundled broadband proposition. In the
short-term, the costs of recruitment will be high, as a
significant proportion of customers will be loss-making
for us before they are migrated onto unbundled lines:
we anticipate a total operating loss from the project of
approximately £50m in the year to March 2007, with
free cash outflow (after capex and the full cash costs
of acquiring customers) of around £110m. We are
provisionally forecasting an incremental operating
profit from the project of £30-40m in the year to
March 2008, and a full payback on the cash
investment within four years.
Our non-UK residential fixed line operations made
steady progress during the year. We now provide
services in Belgium, France, Germany, Ireland, Spain
and Switzerland. At the year end we had 341,000
fixed line customers outside the UK, generating
revenues of £66.4m (2005: £35.4m) and contribution
of £7.1m (2005: £1.8m). Throughout Europe our fixed
line model benefits from the low cost of customer
acquisition that our store network gives us. We are
reviewing our product strategy in each country to
reflect market developments, so that in all cases
we are achieving the maximum return for the Group
from each customer.
Dealer Division
2006 2005
Headline Financials £m £m
Revenue 188.4 132.0
Contribution 2.1 1.5
Support costs (1.4) (1.5)
EBITDA 0.7 0.0
Depreciation and amortisation (0.8) (0.7)
EBIT (0.1) (0.7)
EBIT % (0.1%) (0.5%)
Dealer operations comprise our pre-pay voucher
distribution business, our indirect distribution operations
and the wholesale shipment of trade-in handsets.
The division was boosted during the year by the
acquisition of Hugh Symons, a major independent
distributor in the UK market. Revenues were up 42.8%
to £188.4m and the division reduced its Headline
EBIT loss to £0.1m.
The European VAT authorities continue to investigate
the recovery of VAT in the industry for trading activities
conducted prior to April 2003. Having undertaken
a detailed internal investigation and taken advice,
we continue to believe that we have no financial
exposure to this issue within the financial statements.
The Carphone Warehouse Group PLC Annual Report 2006
14
ACQUISITION OF ONETEL
AND TELE2 UK
INVESTMENT IN LOCAL
LOOP UNBUNDLING
LAUNCH OF FREE BROADBAND