Tiscali 2003 Annual Report Download - page 30

31
One of the main factors behind this positive result was the operating and industrial synergies produced by the roll out and mana-
gement of the proprietary network, which bear out the validity of the Group’s decision to develop its own national and internatio-
nal infrastructure. The system has improved industrial efficiency to a great extent thanks to:
• synergies in equipment purchasing, running and maintenance;
• big savings on the main network costs, obtained thanks to IRUs (indefeasible rights of use) contracts; these are multi-year
contracts lasting 15-20 years, which allow the Group to acquire capacity from third parties;
• the almost complete elimination of IP transit costs, achieved via peering agreements.
These factors have slashed the proportion of variable to fixed or semi-fixed costs, and mean that a high degree of operating leve-
rage can be achieved as traffic volumes increase.
Gross profit from services stood at EUR 334.6 million, a 33% increase on the previous year. The gross margin was 55%, versus
49% in 2002. This performance was achieved thanks to the network efficiencies described above.
Business services generated gross profit of EUR 83.2 million, and a gross margin of 52%, a substantial improvement on 2002,
when the gross margin was 49%. This performance was made possible by operating and industrial synergies created as a result
of the acquisitions made during the year.
Gross profit from portal services stood at EUR 23.8 million, or 50% of revenues. This was broadly stable compared to 2002.
Gross profit from voice services was EUR 15.3 million, or 22% of revenues. This was a significant improvement on the previous
year, when gross profit stood at EUR 8.1 million, and the gross margin was 16%. This performance was the result of a better pro-
duct mix, with low-margin products being eliminated.
Operating costs
Operating costs totalled EUR 380.4 million, or 42% of revenues; this represented a substantial improvement on the previous year,
when they accounted for 49% of revenues.
Sales and marketing costs were EUR 140 million, or 16% of revenues. This was broadly stable on the percentage registered in
2002, although the costs went up in absolute terms owing mainly to a focus on advertising new access services. Most of the costs
went on the launch of ADSL services, with EUR 18.5 million spent on advertising; given their extraordinary nature, these costs
were capitalised and amortised over two years.
Personnel costs came to EUR 142.1 million in 2003, versus EUR 140.1 million in 2002, and fell to 16% as a proportion of revenues,
from 19% in 2002. The reduction was achieved following the reorganisation largely implemented in 2001 and 2002. The fourth quar-
ter of 2003 also saw the rationalisation of staff in France, which became necessary following Tiscali’s acquisition of Cable and Wireless.
At 31 December 2003 Tiscali had 3,226 employees, compared with 3,039 at end-December 2002. The increase was due mainly
to the acquisition of C&W in France.
G&A costs totalled EUR 98.3 million, or 11% of revenues. This was a decline on the EUR 100.9 million posted in 2002, when
the costs accounted for 13% of revenues.
The wide-ranging restructuring completed in 2002, together with continued revenue growth, have caused operating costs to fall gra-
dually and EBITDA to rise. In 2003 EBITDA was positive to the tune of EUR 74.7 million, compared with only EUR 1 million in 2002.
The Company made an EBIT loss of EUR 228.9 million, a big improvement on the EUR 399.8 million operating loss posted in 2002.
As stated earlier, EBIT was boosted by an extension to depreciation (network equipment) and amortisation (goodwill) periods.