Carphone Warehouse 2008 Annual Report Download - page 28

Headline Financials
Directors’ Report: Business Review
Operating Reviewcontinued
16 The Carphone Warehouse Group PLCAnnual Report 2008
Blended broadband ARPU was £21.9, a little ahead of our expectations
at the beginning of the year. This positive move reflects the increasing
proportion of TalkTalk broadband customers, who take a package of
calls, line rental and broadband services, within the total base. At the
same time, we stabilised the falling ARPU trend within AOL by developing
innovative new products, such as the free laptop offer we pioneered,
and by selling voice services into the AOL customer base. At the end
of the period, 52.8% of the broadband customer base also took a voice
service from us.
Even though many TalkTalk customers came out of contract during
the second half of the year, churn rates edged down during the year
as our customer service improved and network quality became more
robust. Given our value proposition and the continued improvements
to service we are making, we are confident that churn will continue to
fall in the coming year.
EBITDA for the residential business was up almost four fold to £186.6m
(2007: £37.5m), with the EBITDA margin increasing from 4.9% to 17.2%.
The significant progress was down to three factors: the full year effect
of the AOL acquisition; the unwinding of last year’s start-up losses
stemming from the launch of free broadband; and the migration of
a significant number of customers onto our own unbundled network.
At the start of the financial year, we were providing service to only 30.9%
of our broadband customer base from our own network infrastructure,
via local loop unbundling. By March 2008, this figure had grown to
66.9%. It is significantly more cost effective to deliver service to customers
over our own network rather than via BT, and this is reflected in the
margin improvement. After another year of major capital investment, we
now have our own fully unbundled equipment (allowing us to provide
broadband, exchange line rental and call services off the lowest possible
cost base) in more than 1,600 exchanges, and partially unbundled
equipment (from which we can provide efficient broadband-only services)
in just over 1,000 exchanges. This makes us comfortably the biggest
unbundler in the UK, in terms of both our geographic coverage and
the number of customers on our network.
Our goal for the coming year is to continue to grow the residential
customer base, and to further extend our network coverage to
maximise the opportunity. We expect to have almost 80% of
our customers on our own network by March 2009.
Business
Our UK business-to-business operations, under the Opal brand, enjoyed a
good year. While revenues were down 2.5% to £312.0m (2007: £319.9m)
within the revenue mix there was a significant shift towards higher margin
The UK Fixed Line division comprises our residential and business-to-
business fixed line telecoms businesses in the UK, trading under the
TalkTalk, AOL and Opal brands; and our telecoms network operation,
The Carphone Warehouse Networks. The main assets of the division
are our network infrastructure, one of the largest and most advanced
telecoms networks in the UK, and our base of over 2.7m residential
broadband customers.
Divisional revenues were up 29.1% year-on-year to £1,399.6m (2007:
£1,084.3m), reflecting underlying growth in the residential business and
the full year impact of the acquisition of AOL’s internet business in the
UK at the end of 2006. EBIT rose to £125.6m (2007: £19.7m) with EBIT
margins expanding from 1.8% to 9.0%, with the increase driven by the
significant margin uplift achieved by migrating broadband customers
onto our own network. The EBIT margin in the second half of the year
was 12.3%, giving us good visibility of our target of 12-12.5% EBIT
margin in the coming year.
Residential
Residential revenues were up 42.3% year-on-year to £1,087.6m (2007:
£764.4m). Excluding the acquisition of AOL’s UK business in the prior
year, revenues were up 7.1%. During the period we increased our
broadband customer base by 442,000, or 19.4%, to more than 2.7m,
representing an approximately 17% share of the UK market. Our base
of voice-only and internet dial-up customers declined by 29.2% to 1.7m,
as we focused on migrating customers to bundled broadband contract
products. Overall we are the number three player in the UK residential
telecoms market, and have the largest unbundled telecoms network.
UKFixed Line:
Delivering on its promises
During the year we significantlyimproved customer service,
built out our networkand invested in growing the customer base.
2008 2007
£m £m
Revenue 1,399.6 1,084.3
Residential 1,087.6 764.4
Business 312.0 319.9
EBITDA 225.6 68.7
Residential 186.6 37.5
Business 39.0 31.2
Depreciation and amortisation (100.0) (49.0)
EBIT 125.6 19.7
EBIT % 9.0% 1.8%