Carphone Warehouse 2008 Annual Report Download - page 22

Directors’ Report: Business Review
Chief Executive’s Review continued
10 The Carphone Warehouse Group PLC Annual Report 2008
service provision customer base over time, will see Mobile revenues
decline year-on-year. This change is neutral to profitability but positive
for cash flow as we will subsidise fewer of our connections ourselves.
Altogether, we anticipate revenue growth in Distribution of 9-10%,
with EBIT likely to be relatively flat year-on-year. However, this reflects
the absorption of approximately £15m of costs previously accounted
for within our central PLC overhead; so the underlying performance is
expected to reflect solid progress despite the tough retail environment
and the substantial investment in evolving the retail business model.
In our UK Fixed Line division, we expect top line growth of 4-5%, driven by
a combination of further broadband customer growth and an improvement
in blended ARPU. This will be offset by a continuing decline in our voice-
only and dial-up customer bases. We expect to add approximately 400,000
broadband customers during the year, with a weighting to the second half.
EBITDA margins in UK Fixed Line are expected to increase to
22-23%, primarily as a result of the migration of customers onto our own
unbundled network. The investment in capex and customer recruitment
costs over the last two years will translate into a significant year-on-year
increase in depreciation and amortisation charges. Nevertheless, we
expect EBIT margins to grow to 12-12.5%, representing an improvement
of over three percentage points over this year.
I am very proud of what we have achieved over the last 12 months.
In broadband, we got ourselves into a hole and we have managed to
dig ourselves out very successfully. However, we cannot afford to be
complacent. In the Distribution business, we identified the emerging growth
trends of the year, and we began the important evolution of the business
that we are now accelerating. We have a great team at The Carphone
Warehouse and everyone has worked exceptionally hard over the last two
years – often through very testing times – to deliver a strong operational
performance. We are no less determined to do the same in the coming year.
Charles Dunstone,
Chief Executive Officer
“We are continuing to develop our retail
proposition in response to the needs of
our customers. We have never considered
ourselves to be retailers of hardware;
our DNA is much more about helping
customers understand technology”
Charles Dunstone, Chief Executive Officer
excellent returns. We believe this advantage is set to continue into the
medium term.
Looking forward, we see a year of further investment and growth. On
the network side, we are putting in place the infrastructure to protect our
margins as customer usage rises, and again our engineers are leading
the industry in this regard. We are also investing in continued customer
recruitment and the introduction of new and innovative bundles, as we
seek to maximise the advantage that our efficient network gives us.
At the same time, we are committed to delivering further significant
improvements in customer service, both through the speed and quality
of the broadband connection and through our ability to fix customers’
problems in our contact centres.
Outlook
We remain cautious in our outlook for the year ahead, given the poor
economic climate and inflationary pressures on European customers.
In our Distribution business, we believe that new areas of growth in the
market, and our own focus on evolving our retail proposition, will help
us offset some of the risks to consumption presented by the tougher
economic environment. Our track record speaks for itself: while countless
other independent mobile phone retailers have fallen by the wayside over
the years, we have continued to grow and flourish – because we have
successfully identified changes in the marketplace and adapted our
model to take advantage of them. Our new venture with Best Buy
will enable us to adapt our business to our customers’ changing needs
better and more quickly than we could on our own, as well as giving us
a whole new avenue of potential growth in the wider consumer electronics
market place.
We are targeting mobile connections growth of 8-10% in the coming
year, with an even balance between subscription and pre-pay growth.
The current runrate of sales in new areas such as mobile broadband and
smartphones comfortably supports this goal, and we are also optimistic
that the pipeline of new mobile handsets over the coming months could
see renewed growth in the mobile voice market. The growth trajectory
is, as usual, supported by further physical expansion, with 120 net
new stores planned over the coming year. This is a lower rate than
in the past, but we are focusing on larger stores and a number of
relocations, so average space growth will still be close to 10% and
we have not changed our view on the longer-term growth prospects.
Elsewhere within Distribution, we expect our high value ancillary revenue
streams of Insurance and Ongoing to continue their very consistent
performance of recent years, with revenue growth driven by subscription
connections. A change in our business model in Germany, which will
make connections more profitable at the point of sale but reduce the